More than a third of investors in funds of hedge funds plan to cut out the industry in future and move towards direct investment in single-name hedge fund managers, according to the results of a new survey.

Funds of funds were once the preferred method of investment in the hedge fund industry, but the financial crisis and the Madoff scandal have exacted a heavy toll.

Many of the industry’s biggest names have suffered from vicious redemptions over the past 18 months as investors – particularly wealthy individuals and private banks – have retrenched in volatile market conditions.

At their peak, funds of funds managed close to $900bn, accounting for an estimated 48 per cent of all investments in hedge funds.

According to the survey – conducted by the investment consultancy Preqin in June – the financial crisis has prompted a big shift in investors’ opinions of the industry.

Of the investors that have moved out of funds of funds, 80 per cent began doing so after the financial crisis in 2008.

The single biggest reason for moving out of funds of funds cited by the poll’s respondents – who included pension funds, asset managers, banks, family offices and endowments – was fees.

Investors in funds of funds are exposed to a double layer of charges.

One set of charges – usually ‘2 and 20’, or two per cent of assets and 20 per cent of returns – is charged by the underlying hedge fund managers.

A further set – usually ‘1 and 10’ – is charged by the fund of fund manager.

“In 2008 and 2009 many institutional investors liquidated portions of their hedge fund holdings and put further investment on ice until markets stabilised.

“When the time came to reinvest this available capital, many institutions chose to invest directly in funds, avoiding the extra layer of fees they would be subject to if they invested in funds of funds,” the survey said.

Greater control of investments and a growing ability to make investment decisions in-house were also cited as key reasons for the shift.

The funds of funds industry has already begun to divide, with managers that have had historically strong relationships with institutional investors, particularly pension funds, coming out on top.

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