FRM’s flagship fund of funds showing good relative performance

Financial Risk Management’s long term record as a fund of funds manager is reasonable. The only significant blip on the record was the one shared by most funds of funds, that is, a big loss in 2008. Like all serious funds of funds the firm makes a large effort in risk measurement and understanding of the risks taken on behalf of their investors. There has been a pay-off for  that effort since the end of 2008 as the FRM flagship fund, the Absolute Alpha Diversified Fund, has out-performed the typical multi-manager hedge fund product last year and this.   

The relative performance has been good in the year to date. The whole of the monthly/annual track record is shown below.

Despite losing months in May and June, FRM’s AA Diversified Fund is still up for the first half of 2010. It should be borne in mind that the Diversified Fund is over $2bn, so degrees of freedom are less than those of smaller funds. For comparison, the Barclay Fund of Funds Index is down 1.4% and the HFN Fund of Funds Aggregate Index is down 1.27% over the same period.  It is noteworthy that FRM’s multi-manager fund lost only 1.54% in May, a month in which single manager hedge fund indices were down over 2 ½ %. So tail risk was curtailed for the fund of funds as an investor would hope for a mature single manager hedge fund.

This year the Fund will have benefitted from exposure to statistical arbitrage managers as volatility went up, and more significantly from the allocations to macro/directional managers (with the exception of a Top 10 allocation to Moore Global Investments). Relative performance will also have been helped by the portfolio level hedges applied by FRM which are used to limit the equity beta exposure of the fund-of-funds.

April saw Outflows - Negative Data Revisions Caused by Funds of Funds?

A month ago when I reported on industry fund flows I wrote:

"The flows at the industry level are unlikely to pick up in the next few months given the gyrations in the markets for traditional assets. Collective memory of falling markets is still strong at this point, only just over a year on from the market lows. The level of traded equity volatility has doubled in the last few weeks, and price levels in FX, commodities, equities and bonds have shifted quickly enough that the perceptions are that the markets are trading more emotionally. This is not the background against which most institutional investors can devote senior management time to making active decisions about allocations to hedge fund strategies, and still less about allocations to individual hedge fund managers."

My expectations were met in April, as TrimTabs Investment Research and BarclayHedge reported that the hedge fund industry posted an estimated outflow of $3.5bn in that month.  


Industry Level Net Flows Per Month

Inflows in November 2009     $18.7bn

Inflows in December 2009      -$3.8bn

Inflows in January 2010           $7.1bn

Inflows in February 2010        $16.6bn

Inflows in March 2010             $7.6bn

Inflows in April 2010              -$3.5bn

Source: TrimTabs Investment Research and BarclayHedge

TrimTabs and Barclayhedge also reported that the April flows "were the third outflow in five months". This was not how the flows data were reported month by month - the table above gives the flows as originally reported in each month, and April was the first negative flow of the year for the industry. This suggests that  the early estimates of (positive) flows were not backed up by the subsequent data reported to databases.

All hedge fund databases get a similar experience - the early reporting funds are usually those with better numbers to report. Also funds of hedge funds report to databases with a lag to single managers. The negative flows could be concentrated in the multi-manager hedge funds, which would be consistent with barely a month of positive inflows to funds of funds (in aggregate) since the middle of 2008.

So positive flows, such as there have been, have been concentrated in single manager hedge funds, and funds of hedge funds as a whole continue to have difficulty attracting net new assets.