S&P’s review, covering six managers offering 10 rated capabilities, was conducted in February 2012. 

“This year’s annual review of alternative multi-asset products comes on the heels of difficult 2011 year-end performance,” said S&P fund analyst Jason Patton. 

“With all asset classes still struggling to win investors away from cash, we expect developments in Europe will dictate overall appetite for investment products other than defensive ones in the current environment,” said Mr Patton. 

Against this backdrop, managers are tailoring products to offer efficiency gains and improved protection in negative markets. In other key findings: 

• Managed futures and other “long volatility” profile strategies are garnering greater allocation within FoHFs.
• The distinction is increasingly apparent between products with high equity beta characteristics and those showing a more “alternative” return profile with limited equity beta exposure.
• The ready availability of ETFs and alternative beta products is putting fee pressure on strategies with higher levels of traditional asset class betas, including many classic FoHFs.

5 July 2012

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The growing demand for transparency, increased liquidity, fee structure changes, and lower stock-market beta products have increased competition in the sector. The classic fund of hedge fund (FOHF) model—offering investors “access” to a diversifying set of alpha managers, albeit at a higher cost and with reduced liquidity—is being challenged, especially where performance has been poor.

“During the GFC, many multi-manager/FOHF products failed to deliver absolute returns or diversifying protection from equity market sell-offs, raising significant doubts in investors’ minds as to the core value premise of the format. High profile due diligence failures compounded its unattractiveness, along with relatively high fee structures. In addition, some products using single-manager multi-strategy and active multi-manager models that incorporate tactical exchange-traded fund (ETF) and index-like allocations have outperformed the “alpha manager” FOHF model,” said S&P Fund Services analyst Michael Armitage.

He added: “We view the “allocate and pray” feeder FOHF model as dead. In future, we expect offerings that fail to compete in terms of active oversight, transparent risk management, product-level liquidity, and competitive fees to lose out to the growing competition from newer funds designed from the ground-up to deliver on these features. There were several upgrades in this year’s sector review as we recognised funds with some of these product advantages and gained conviction in other offerings that had shown extended track records since our previous reviews.”

The Alternative Strategies – Multi Asset – Diversified Multi-Manager And Multi Asset – Multi-Strategy Sector Report published today, together with reports for all funds rated as part of the review, are available on S&P’s subscriber website www.fundsinsights.com

We also withdrew our ratings on the following four headline funds:

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