Sub-Advisor Funds of Hedge Funds: Sector in Brief

June 2017

The ‘sub-advisor fund of hedge fund’ (or ‘fund of sub-advisor’) model is the latest innovation to disrupt the hedge fund sector.

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What are sub-advisor FoHFs? A new family of products; a less expensive alternative to FoHFs. Rather than investing directly into underlying hedge funds, the advisor collaborates with hedge fund managers who act as sub-advisors. Several large asset owners have developed similar structures in-house. This note outlines product features, target returns, expected equity beta and fees.

Benefits and drawbacks: Pros include a single layer of fees, a transparent managed account structure and UCITS compatibility; cons include hedge fund non-participation and opacity on how the underlying economics are shared.

Who’s investing? Asset owners seeking liquid, diversified, multi-strategy hedge fund exposure in a commingled fund format. UCITS compliance creates a bias towards a European investor basis, while the commingled structure enables smaller allocation sizes from small-to-mid-sized institutional investors and family offices.


Last year saw major industry names launching the first commercially available ‘sub-advisor fund of hedge funds’; 2017 has brought the first allocations by bfinance clients.

The main benefit is significantly lower cost than a traditional fund of hedge funds (FoHF). Rather than investing directly into underlying hedge funds, the investment advisor collaborates with a range of hedge fund managers who act as sub-advisors for investments in a dedicated capital sleeve. The provider can offer a single layer fee structure, sharing out the economics behind the scenes. For European markets, these are generally offered as UCITS-compliant funds (the focus of this note).

We expect to see increased asset owner attention and more manager offerings for this model. Yet there is a comparatively high barrier to manager entry in terms of infrastructure and leveraging hedge fund relationships, which favours larger asset managers.

Although there is no expectation that the sub-advisor model could replace the traditional FoHF structure, it does bring new breadth to the market, which we view as a positive development. We also expect that the lower costs will drive further fee compression in the FoHF sector, where fees have already fallen by 20% in recent years according to bfinance data.

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This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.

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