The Morning Brief: Funds of Funds Face Asset Declines, Again

Well, that was short-lived. Reports of funds of funds’ recovery are apparently premature. After the funds of funds industry in 2014 reported its first increase in assets since the financial crisis, assets slipped again in 2015. Total assets fell by $12 billion to end the year at $807 billion, according to London-based research firm Preqin. Over the past two-year period, however, assets are still up about $21 billion. However, just 32 new funds were launched worldwide last year. This compares with 86 launched in 2014. Some 97 funds liquidated in 2015.

However, the recovery in the North American funds of funds business appears to remain on track. According to the report, the region has experienced annual growth since 2011. What’s more, 34 percent of North America-based fund-of-funds managers said their assets increased last year, while just 25 percent reported a decline. Also, just 24 percent of the world-wide liquidations of hedge funds of funds were in North America last year, down from 33 percent to 36 percent in each of the four previous years.


Fitch Ratings said it does not yet see pressure on various debt ratings of Pershing Square Holdings, despite the sharp losses incurred by its investment in troubled drug giant Valeant Pharmaceuticals International. In a report issued Friday, the New York debt rating agency said ratings for the public hedge fund managed by William Ackman’s Pershing Square Capital Management “remain supported by very low levels of debt-to-total capitalization relative to assigned ratings,” citing the absence of restrictive covenants associated with the debt, increased cash following the sale of some of PSH’s holdings in Mondelez International, and Pershing Square’s increasingly active involvement in Valeant. From June 30, 2015 through March 22, 2016, PSH’s net asset value has declined by 42.4 percent, which caused its debt-to-total capitalization to climb to 20.4 percent from 12.9 percent. Fitch said if Valeant’s share price were to go to $0, PSH’s debt-to-total capitalization would rise to around 23 percent, assuming no movement in the values of all of its other holdings.

“From a quantitative perspective, this level would still be viewed as consistent with the current ratings, although Fitch would also consider what breakdowns in the investment and risk management framework led to such an outcome, as well as the degree of franchise damage incurred,” Fitch added.

In its annual report issued on Friday, Pershing Square asserts that its bonds are the senior-most obligations, adding that despite a substantial decline in the fund’s net asset value, the bonds “are covered by cash, U.S. Treasuries, and highly liquid marketable securities that represent about five times the $1 billion face amount of these securities.”



Meanwhile, Pershing Square reported that it spent $563 million last year on total remuneration, according to its annual report disclosed on Friday. It does not break down the compensation on an individual basis. This is shocking given that the hedge funds were down 20.5 percent for the year.