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Demise of Fund-of-Funds Continues Apace
1794 Commodore Funds is the latest fund-of-funds firm to shutter its doors.
Another fund-of-hedge-funds firm is shutting down.
The 1794 Commodore Funds is winding down its three funds over the next six months. Founded in 2002, the firm is a joint venture between York Capital Management, a multibillion dollar event-driven hedge fund manager, and William A.M. Burden & Co., the family office for the Vanderbilt estate. 1794 refers to the year Cornelius Vanderbilt was born, while Commodore was the nickname for the steamship magnate.
The funds which were flat to down 1.5 percent last year managed between $150 million and $200 million.
York Capital Management would not comment; however, sources say the $14 billion hedge fund firm, which did not market the event-driven fund-of-funds, was concerned that it was unable to raise assets at Commodore, an essentially break-even business.
Commodore expects to return all money to investors by the end of the second quarter. Part of what is holding things up are illiquid side pocket investments with Cerberus Capital Management and Och-Ziff Capital Management Group, to name at least two which take time to liquidate.
The closure, however, is part of a wider trend that has been unfolding in the hedge fund industry for some time now. While the amount of money flowing into single manager hedge funds has been on the rise since the 2008 market implosion, fund-of-funds have been in decline. According to Hedge Fund Research (HFR), there has been a steady shrinking in the number of fund of hedge funds since the peak in 2007; there were 2,018 fund-of-funds at the end of the third quarter of 2011, down 18 percent from 2,462 in 2007. The number of single manager funds is down from 2007 as well, but the total number has been steadily rising since 2008. Whats more, inflows to single manager funds have risen for the past nine months.
There has definitely been a period of protracted consolidation, says Kenneth J. Heinz, president of Hedge Fund Research.
Part of the problem has been performance. Fund-of-funds, which charge fees on top of the fees charged by the hedge funds in which they invest, have seen their performance lag in this lower-return environment for four straight years and seven of the past eight, according to HFR.
Experts also say the smaller fund-of-funds are losing their historic key customers, the high-net-worth individuals who are moving more toward wealth management platforms promoted by the large banks such as Merrill Lynch, Morgan Stanley Smith Barney, and JPMorgan Chase.
At least one expert believes the larger fund-of-funds will survive and thrive since they rely more on institutions and pension funds. However, a number of pension funds have been dropping their fund-of-funds in favor of selecting their own portfolio of single manager funds as hedge funds become more transparent.
Clearly the fund-of-funds industry is evolving to re-establish the value proposition to investors, says Heinz.
York is not the only hedge fund firm that also has a fund-of-funds business. Others include Lone Pine Capital, Avenue Capital and Maverick Capital.