Janus, commonly depicted with two faces, is the Roman god of gates and doors: one face looking behind and the other looking towards what lies ahead. In this role, Janus can contemplate the happenings of an old year while looking forward to the new. The InvestHedge Billion Dollar Club, as well as the final nominations for the InvestHedge Awards, show that 2009 was pivotal for funds of funds in terms of assets and performance.
Despite losing nearly $72 billion of assets in 2009, the industry actually grew in the second half of the year. Performance picked up and ended the year at an average of 9.21%. The asset outflow of $95 billion in the first half of the year has clearly stalled and indeed turned around - with 50% of the world's 114 largest funds of funds showing positive inflows for the full year. That is double the proportion that had shown inflows in the first six months.
Despite this air of optimism, there are those who see direct investing by pension funds such as PGGM, ABP and now the UK's Universities Superannuation Scheme as a threat to funds of funds. That is the gloomy scenario of those who feel the whole fund of funds model has been battered beyond repair.
On the other hand, in his role as the guardian of exits and entrances, could there be a modern day Janus that emerges as figurehead for the next phase of development in the fund of funds industry? After all, in their true role as guardians of capital, the 'right' funds of funds - and certainly the best ones - are clearly still able to satisfy the need to be able to invest the right amount of money at the right time with the right manager in the right strategy.
In the current market, 'right' can be defined to include firms such as Blackstone, Aurora, Fauchier, Aurum and Archstone. They and other firms not only survived the shakeout of the last 18 months but have shown positive asset growth in 2009 as well as multiple nominations for performance at the forthcoming InvestHedge Awards (see page 26). It is not surprising that firms such as those are beneficiaries of the new asset inflows.
Indeed, those that can see beyond the fear will be able to see that the resources (and now barriers to entry) required to maintain the infrastructure to pick the right hedge funds are high and getting higher. Why else would ABP and Hermes have spun out their hedge fund investment arms into part-owned funds of hedge funds, where the fees from other commingled clients help pay the costs?
When asked what was on the drawing board for 2010, 25% of the InvestHedge largest funds of funds replied: UCITS III. As Janus is also believed to represent beginnings, it seems that funds of funds (and the underlying hedge funds too) are entering a new era: one where distribution is as key as manufacturing. For this reason, unlike many fads before it, the UCITS III structure is likely to stick, which is why -HedgeFund Intelligence is set to launch UCITS Direct on the back of its newly launched absolute return UCITS database.
The explanation for Janus' role in new beginnings comes from the idea that one must emerge through a gate to enter a new place; indeed, any investor caught in the gates and side pockets of the last 18 months will certainly be rethinking their investment policy.
Key to being able to see the past is to adapt those lessons into the future. Investors are now much more aware of liquidity terms and are actually reading their documentation to see what the gating policy is before investing. While the current mad rush to making all vehicles highly liquid is possibly a knee-jerk reaction too far - some great returns can be made in longer lock-up situations - there is now new investor awareness on this subject.
As an interesting aside, January is derived from the Etruscan word jauna, which means door. And Janus was actually honoured on the first day of every month - metaphorically in line perhaps with a more sensible liquidity profile for the future-looking hedge fund industry.