European investor appetite for niche FoHF offerings growing

Europe's fund of hedge funds industry has suffered AUM declines since 2008 but there are signs of a rising appetite for niche strategies and bespoke mandates. Stenham has launched two niche FoHFs

Stenham spots appetite for niche FoHFs

With the launch of Stenham Credit Opportunities and Stenham Healthcare, the asset manager is bucking a trend by European investors to shun fund of hedge funds (FoHF) products.

Since 2009 there have been no big FoHF launches from the European-based managers. Investors in Europe were particularly dissatisfied with the gating and suspensions of many FoHF products in the aftermath of the financial crisis. Many decided to switch to direct investment in hedge funds or via managed account platforms in order to get exposures.

Stenham Asset Management believes it has found the sweet spot for these investors who are looking for niche or differentiated strategies for their portfolios.

"[Clients] have been looking for something that either acts as a hedge for their portfolio or at least offers an uncorrelated, differentiated source of return or something very specialist that they do not have the skillset to analyse themselves," says Lynda Stoelker, head of investment research at Stenham.

As investors seek opportunities outside the larger established hedge funds, many are looking at niche strategies and smaller managers. However, many institutional investors find it difficult to find and evaluate niche managers. At the same time high-net-worth individuals and family offices are also beginning to return to hedge funds and traditionally were attached to the more esoteric strategies and smaller managers.

The credit opportunities fund was originally created as a bespoke mandate for a European family office. "[The family office had] a large long-only bond portfolio and were becoming increasingly concerned about their returns but also the credit risk as spreads and yields contracted as well as duration risk," explains Tim Beck, senior research analyst and fund lead for Stenham Credit Opportunities.

"We could offer them long/short credit funds. These can actively short the market, benefit from asymmetry and can short the names, which have been the most popular high yield ETFs or high yield mutual funds. In addition they can access parts of the market that are structurally inefficient and more traditional investors cannot access – be that structured products or distressed debt where we see greater opportunities on the long side," adds Beck.

He says there is interest in the strategy from family offices and high-net-worth individuals who want an investment to complement their long-only bond portfolios.

The commingled FoHF originally launched in January now has $23 million under management, largely from high-net-worth individuals. The fund has returned 3.44% to the end of March and is estimated to be positive in April. It invests in six to 10 underlying managers running credit long/short, structured credit and distressed debt strategies.

The idea to launch the Stenham Healthcare fund originated after Stenham began researching sector specialists for a bespoke portfolio. The FoHF was launched in January and manages $25 million. It invests in six to 10 managers investing in equities in the healthcare sector. The fund has returned 7.48% to the end of March and is estimated to be positive in April.

Fund lead for Stenham Healthcare is Dominique Montier who joined Stenham as a senior executive and member of the investment advisory committee in September 2010 as part of its acquisition of Montier Partners, founded in 1996 by Montier.

In previous roles at asset manager Paine Webber (now part of UBS) and Lehman Brothers, he gained experience of investing in the healthcare sector. Montier believes an ageing population and the emerging middle class in developing markets will contribute to long-term structural growth for the sector.

The FoHF launches follow Stenham's expansion of its offering in 2012 to include Stenham Helix, a global macro FoHF and Stenham Emerging Markets, a long-biased FoHF. Its first FoHF was multi-strategy fund Stenham Universal, which was launched in 1992. It now also offers multi-strategy, credit and commodity FoHFs, managing a total of $2.1 billion as of March 2013.

Stoelker says future product development will focus on bespoke mandates, which are in demand from European investors. US investors, while still interested in commingled FoHFs, are looking for larger, more established funds. Some mandates from US investors have specified a 10-year track record, according to Stoelker.

Despite experiencing continued demand for FoHFs, Stoelker admits it is a tough environment. FoHF assets have been shrinking. PerTrac reported a decrease of $22 billion in FoHF assets under management from the end of 2011 to the end of the first half of 2012.

There has also been a spate of consolidations in the FoHF industry. One of the most publicised was Man Group's acquisition of FRM, completed in July 2012.

Stoelker expects more consolidation to come. "There are funds of funds which struggle to increase AUM, particularly organisations offering one fund focused on one strategy. If they haven't diversified into other product offerings the path ahead could be difficult and you will therefore continue to see consolidation."

The next casualty of the investor pull-back from FoHFs in Europe could be Signet Capital Management. There are rumours a US-based FoHF is eyeing the business. The company's founder, chairman and co-head of investment management, Robert Marquardt, confirmed Signet has held talks with various groups over the last two years with a view to selling.

"If [a sale] were to happen, it's because no-one is raising money in Europe. Nothing is happening in Europe and money is being raised in the US." He added that Signet is now focusing on its Ucits, single-manager hedge fund and loan businesses.

Meanwhile, Signet's FoHF business is moving to a "formula which is much more focused on outperformance and smaller managers rather than index products", according to Marquardt.