Huw van Steenis of Morgan Stanley out with a very sobering report on the hedge and fund of fund industries earlier, with the simple conclusion that hedge funds asset under management may fall from $1.2 trillion to $500 billion (in their bear case scenario; $950 billion in the base case). Aside from poor ongoing performance, the culprit will be escalating redemptions from both private clients, and the marginal (if any) role fund of funds (90% of all Och Ziff redemptions came from FoF) and endowments (not to mention state pension funds) will play in the future. And while deleveraging may no longer be a critical force as we wrote before, further forced selling is likely to exacerbate the vicious circle of declining asset prices and redemptions.
i sold ONE fund of funds in my career... a fund of funds is an investment in a fund COMPRISED of other funds...mutual funds usually...here are my observations of that fucked up market:
1 - there's only really a handful of investors who buy that stuff...mostly insurance companies
2 - you're investment is in a fund managers ability to manage a fund...the study of content of funds are not as important as knowing who the fund manager is and what the ratings are on each specific tranche
3 - the insurance companies that buy this shit don't buy it to sell it...they buy it with the knowledge that they're probably wearing it until they mature
4 - the buyers know who the other buyers are...there's tiers of investors as it relates to total assets managed...so if the big fish has put in for an order of 100MM worth, the smaller fish have no problem with asking for 20MM or so...so when marketing, it's important to price it to the lead orders interest...when that occurs and an order comes in, the others just follow...the mentality has always been, "well - they must be comfortable so therefore WE should be comfortable"
5 - half of the salesman have no clue about how to sell a fund of funds...we merely present prospectus memorandums to the geeked up buy-side analysts and inform them of what the timelines are (when you need to get back to me with an order)...the other half of the salesmen that sell these things have no FUCKING clue
6 - once they get priced and are delivered, no one speaks of them again.
