More attrition in the land of funds of hedge funds – what is sustainable?

February 26, 2016

This week there was news that Carlyle had, after just over two years, decided to shutter its DGAM Fund of Hedge Fund Unit.  The enterprise had been added to the Carlyle multi-asset stable in November 2013 in order to add fund of hedge funds to the existing offerings within real estate and private equity.  It also sat alongside the direct hedge funds owned by Carlyle, such as Claren Road. According to press coverage, distributable earnings had fallen almost 70% over 2015, creating a drag on earnings for the solutions group as a whole and reflecting the difficulty in “scaling” hedge fund of funds and liquid alternatives.  What is striking is the short amount of time that this business had to prove its mettle as a tool in the multi-asset solutions toolkit.  Typically businesses require time to be fully integrated and start to demonstrate synergies – however it is clear that businesses that create drag on overall enterprise earnings will receive an ever shorter amount of rope.  A similar dynamic was in place with the closure by Principal Financial Group of the Liongate Fund of Hedge Funds in October 2015.

The current rates of attrition in traditional fund of hedge funds offerings should create opportunities for established groups that have for some time been converting to the partnership model – of offering customized accounts for institutional clients.  It also offers a chilling prognosis for the expected growth of the liquid alternatives space – while competition and interest in this space has grown, perhaps speed to market has been of the essence and there is no room to play catch up.  Finally, it is a reminder of the fickle nature of hedge fund investors as the allocation label comes under continued pressure.   http://www.reuters.com/article/carlyle-group-closure-dgam-idUSL3N1614B8