As if everyone’s database wasn’t already in tatters. Today comes news of the expected consolidation wave that will roll-up the Swiss FOF industry.
In an article in Hedgeworld/Reuters, Martin de Sa’Pinto commented that the “you can get there from here” nature of the compensation structure will compell FOFs into one another’s arms.
“Many of Switzerland’s smaller fund of hedge funds providers could be forced to consolidate in order to cover increasingly onerous expenses if they are unable to attract significant assets”
“The small average size of Swiss funds of funds produced low income from management fees, making it more difficult for funds to achieve economies of scale, Peter Meier, head of the center for alternative investments and risk management at the Zürich University of Applied Science, said in a presentation in Zürich.
“I’m sure there are many funds around which no longer have the asset base to cover their costs. Some will need to attract more assets to survive,” Mr. Meier told Reuters after the presentation on Swiss fund of hedge funds.”
The cost of doing business has increased and have surpassed what’s covered by the management fee.
“Most of Switzerland’s funds of hedge funds have less than $100 million in assets, and the mean annual management fee of 1.6% would bring in about $1.6 million dollars for the average-sized fund. Many industry experts say this is not enough to conduct thorough and ongoing due diligence on a diversified universe of up to 100 funds, of which 20 may be targeted as investments.”
An asset management platform or family of funds approach may be the only answer.
“To earn performance fees, funds typically have to achieve new highs in cumulative returns, which means they will first have to make good last year’s losses. “There is a trend towards a larger fund-of-funds size, bigger does mean better for the funds provider,” said Mr. Maier. “But smaller funds may still survive, if they are part of a family of fund of funds using the same due diligence personnel.”
Once these funds roll up into a family of funds of funds structure the way that they leverage the cost base and infrastructure further is to limit fund exposure across the different products. In other words – more assets to fewer funds. Thus creating another headwind in a tough marketing environment.