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Friday, December 18, 2009

Despite the Hype... Many Investors Seem to Be Getting the Right Message....

....and voting with the dollars in a landslide money is going into low cost etfs and coming out of illiquid expensive hedge funds of funds (the hedge fund vehicle targeted at individual investors. See the two articles below

But the dollar$ still in the hedge fund area relative to etfs is still shockingly high imo. At $440 billion worldwide it is a big number. Even if the number of $752 bln in US assets invested in etfs doesn't include the indexed assets invested in US mutual funds and indexed investments outside the US, it is still too low imo relative to the hedge funds of funds numbers.

The most common fee structure for the hedge funds of funds is 2% annual fee + 20% of profits. A well diversified portfolio if etfs could be constructed with an annual fee of .25% with no performance fee at all. That means the hedge fund of fund investors with their $440 billion in assets will be paying an absolute minimum of $7.7 bln in additional fees

my bolds, my comments in bold italics

Assets at Funds of Hedge Funds Drop by Nearly Half Since Peak .

The fund-of-hedge-funds industry has seen its assets continue to drop sharply this year, amid investor withdrawals as its performance has fallen farther behind actual hedge funds.

In terms of asset flows, 2009 has been the worst year on record for funds of hedge funds, with net redemptions amounting to $164 billion world-wide in the first 11 months of the year, leaving total assets at $440 billion, according to data provider Eurekahedge. Value of assets under management peaked at $823 billion in May 2008, meaning assets have now dropped by nearly half.

not only are hedge funds a poor investment, hedge fund of funds the vehicle targeted at "mass affluent" investors perform even more poorly than the overall universe of hedge funds (and often charge additional fees)

Funds of hedge funds have underperformed the hedge-fund industry by more than eight percentage points so far this year, significantly worse than in previous years. The Eurekahedge fund of funds index was up 9.17% for the year to the end of November, while the overall Eurekahedge hedge fund index was up 18.24%; similarly, the HFRI fund-of-funds index published by data provider Hedge Fund Research was up 10.69%, while its overall hedge-fund index was up 18.72%.

In previous years, funds of hedge funds generally underperformed hedge funds by at most a couple of percentage points, according to Hedge Fund Research's figures, with the difference largely attributable to fees.

The fund-of-hedge-funds industry comprises 3,110 funds, according to Eurekahedge. This is 15% down from the total at the end of 2007. The fact that the number of funds has fallen by only 15%, while assets under management have fallen by 50%, indicates that most managers have continued to run their funds but with reduced assets.

The money flows have been in the other direction with regard to etfs:

from index universe

November ETF Assets Hit Record Levels

Investors poured $17.5 billion in new cash into exchange-traded funds and exchange-traded notes in November, according to new data released from the National Stock Exchange, pushing total assets under management in the U.S. to a new record of $752 billion.

Year-to-date, investors have poured $89.7 billion in new cash into various exchange-traded products; down from $132 billion for the first 11 months of 2008, but a strong showing nonetheless.

Most of the inflows were into ETFs, which gathered $17.1 billion, and now have $743 billion in assets under management. ETNs gained $354 million in new flows; combined with market returns, that brought their total AUM to $8.2 billion

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