Hedge Fund of Funds Grow in Popularity

AS INTEREST IN ALTERNATIVE INVESTMENTS grows and investor confidence in hedge funds increases, hedge fund-related strategies -- including the hedge fund of fund (HFOF), a multimanager hedge fund that invests in other hedge funds -- are enjoying a wave of new investment. According to a recent report from Aite Group, large institutional investors are being advised by their consultants to pursue HFOFs and are doing so in droves, creating a major opportunity for technology providers.

Aite reports that global assets of HFOFs surpassed $1.3 trillion in 2007, and by 2011 assets in HFOFs are expected to reach $2.2 trillion, representing an annual growth rate of 16 percent. Similar to direct hedge fund investments, the dollars invested in HFOFs are trending toward the largest market players. In the middle of 2007, Aite notes, the top 25 HFOFs held 44 percent of all HFOF assets.

The growing market currently is well-serviced by the vendor community, Aite says, but as the market continues to expand, so will its technology demands. HFOFs will look to build out client service capabilities, as well as gain control of operational and investment risk while improving overall investment performance, according to the Boston-based consultancy. While many HFOFs still rely on Microsoft products or proprietary technologies for workflow, vendors increasingly are able to offer alternatives to these solutions that are cost-effective and provide scaleable and easily integrated infrastructures, Aite adds.