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Alternative Market Briefing

Opalesque Exclusives – Funds of hedge funds’ liquidity constraints and fees generate negative alpha compared to l/s hedge funds

Monday, June 13, 2011

From Kirsten Bischoff, Opalesque New York:

In a white paper recently released by French firm Orion Financial Partners the firm found that long/short equity hedge funds notched much better performance than UCITS funds and specialty fund of hedge funds. The firm researched returns listed with Eurekahedge and found that "over the period 2005-2011…hedge funds have significantly outperformed UCITS funds and specialized fund of hedge funds respectively around +2.3% and +5.2% in annual terms." The strength of single manager l/s hedge funds was also on display as the firm’s research showed that they exhibited better Sharpe ratios and lower levels of extreme risk compared to the other vehicles.

The paper goes on to say, "More surprisingly, fund of funds posted a negative alpha over the estimation period," which the firm attributes to the additional fee layer, and the tighter liquidity constraints faced by fund of funds managers that have to deal with the lockup and redemption periods of the funds they invest into (which were largely related to the 2008 crisis.

Investors currently have three options for different types of vehicles through which to gain hedge fund exposure: hedge funds, UCITS funds and fund of funds. The paper concludes that While UCITS funds offer higher levels of liquidity, this factors into those managers’ ability to generate alph......................

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