Key Takeaways
- • Three major consulting firms—Mercer, Cambridge Associates, and Towers Watson—rank among the 10 largest fund-of-hedge-funds managers by assets, collectively controlling 12.6% of the $728 billion held by funds of hedge funds with $1 billion+ in assets as of end-2013.
- • Fund-of-hedge-funds industry growth has stalled dramatically, with assets rising only 16.5% since 2009 and remaining well below the $1 trillion peak achieved in 2007, creating intense competition for new mandates.
- • Consultants are leveraging their institutional relationships and expertise developed through decades of vetting hedge fund platforms to win direct investment mandates from large-scale clients, effectively disintermediating traditional fund-of-funds managers.
- • The competitive pressure on fund-of-hedge-funds operators intensifies as consultants who were historically hired to evaluate and recommend hedge fund vehicles now manage capital directly, capturing fee streams that would have previously flowed to dedicated fund-of-funds platforms.
- • Industry leaders acknowledge the structural challenge; Gottex CEO Joachim Gottschalk noted that consultants are actively securing new allocations, signaling that the competitive dynamic will likely persist as institutional investors increasingly favor direct consultant relationships.
Summary
Fund-of-hedge-funds managers face a structural headwind as the institutional consulting firms they depend on for deal flow and investor referrals have evolved into direct competitors for capital allocation. According to Reuters reporting cited in this analysis, consultants including Mercer, Cambridge Associates, and Towers Watson have leveraged their years of experience vetting hedge fund platforms for pension funds and institutional clients to transition into asset management roles themselves. As of the end of 2013, these three firms ranked among the 10 largest fund-of-hedge-funds operators globally, collectively managing 12.6% of the $728 billion deployed across fund-of-hedge-funds vehicles with at least $1 billion in assets.
The timing of this competitive shift is particularly acute given the industry's anemic growth profile. Fund-of-hedge-funds platforms have recovered only 16.5% in assets since 2009, leaving the sector significantly below its 2007 peak of just over $1 trillion. This stagnation traces directly to dual shocks: the 2008 financial crisis depressed valuations and liquidity, while the Bernard Madoff fraud scandal in late 2008 triggered a fundamental loss of confidence in the due diligence capabilities of fund-of-funds managers, prompting significant capital redemptions. Many smaller and mid-sized fund-of-hedge-funds operations subsequently closed or merged, consolidating the surviving base.
The structural advantage now held by consulting firms is formidable. Having spent years evaluating hedge fund strategies, operational controls, and manager quality on behalf of institutional clients, firms like Mercer and Cambridge Associates accumulated proprietary knowledge and established relationships that position them to manage capital directly without the cost structure or reputational liability that fund-of-hedge-funds platforms now carry. Large institutional investors, already comfortable with these consultants' analytical frameworks, increasingly choose to bypass the intermediary fund-of-funds wrapper entirely, allocating capital through direct consultant mandates.
Joachim Gottschalk, chairman and CEO of hedge fund platform Gottex, acknowledged the competitive intensity in new allocation contests, stating that consultants are "active in gaining mandates." This comment underscores that the dynamic represents not a marginal threat but a systematic reallocation of capital flows within the institutional hedge fund distribution ecosystem. As fund-of-hedge-funds platforms struggle to differentiate beyond asset allocation services that consultants now provide internally, the sector faces an extended period of structural headwinds in fundraising and asset growth.
The timing of this competitive shift is particularly acute given the industry's anemic growth profile. Fund-of-hedge-funds platforms have recovered only 16.5% in assets since 2009, leaving the sector significantly below its 2007 peak of just over $1 trillion. This stagnation traces directly to dual shocks: the 2008 financial crisis depressed valuations and liquidity, while the Bernard Madoff fraud scandal in late 2008 triggered a fundamental loss of confidence in the due diligence capabilities of fund-of-funds managers, prompting significant capital redemptions. Many smaller and mid-sized fund-of-hedge-funds operations subsequently closed or merged, consolidating the surviving base.
The structural advantage now held by consulting firms is formidable. Having spent years evaluating hedge fund strategies, operational controls, and manager quality on behalf of institutional clients, firms like Mercer and Cambridge Associates accumulated proprietary knowledge and established relationships that position them to manage capital directly without the cost structure or reputational liability that fund-of-hedge-funds platforms now carry. Large institutional investors, already comfortable with these consultants' analytical frameworks, increasingly choose to bypass the intermediary fund-of-funds wrapper entirely, allocating capital through direct consultant mandates.
Joachim Gottschalk, chairman and CEO of hedge fund platform Gottex, acknowledged the competitive intensity in new allocation contests, stating that consultants are "active in gaining mandates." This comment underscores that the dynamic represents not a marginal threat but a systematic reallocation of capital flows within the institutional hedge fund distribution ecosystem. As fund-of-hedge-funds platforms struggle to differentiate beyond asset allocation services that consultants now provide internally, the sector faces an extended period of structural headwinds in fundraising and asset growth.
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