Building on decent absolute performance in the second half of 2009, funds of hedge funds managers have continued to improve liquidity in portfolios, maintaining significant allocations to long/short equity hedge and global macro.

“FOHFs managers have taken a variety of steps to improve liquidity in portfolios, including investing with hedge fund managers by way of managed accounts, restricting investment to the more liquid strategies, and setting up new funds-of-funds that invest in Ucits III-regulated products,” notes S&P Fund Services lead analyst, Randal Goldsmith.

Reacting to these changes in investment approach, and acknowledging the important role these new vehicles play for investors in the current low-interest rates environment, S&P Fund Services has created a new fund group within its FOHFs’ Directory, containing five Ucits III-regulated funds of funds, and a UK-authorised fund of alternative investment funds.

Looking forward, despite a lack of strong consensus from FOHFs managers about strategies, there was some agreement that low-beta equity hedge could do well.

“FOHFs managers we spoke to have mixed views, but a number think that low-beta equity hedge fund managers should do well,” commented Goldsmith. “Permal's Robert Kaplan makes the point that we have had two years of stock returns driven almost entirely by market direction, during which there has been limited differentiation by stock-specific issues. This leaves good opportunities for stockpickers, in his opinion.”