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The rising interest rate environment of the past three years has had a marked impact on the private funds market, as investors pulled back from alternatives and rotated into liquid fixed income products, given the higher yield, better liquidity profile, and perceived lower risk. Consequently, fundraising has been down in alternatives generally.

The fund of funds corner of the alternative investment world has, of course, suffered as well. These products have long touted diversification as a key reason to allocate to them, as they reduce single manager risk quite significantly, not to mention effectively outsourcing the manager due diligence function – a task that requires an enormous amount of human capital, and therefore cost – to an expert provider.

But another critical role they play is supporting emerging talent across the alternative investment industry, whether that be the next great equities trader in the hedge fund space, or the next discoverer of tech unicorns in venture capital circles. Smaller, emerging funds are frequently too small to receive a check from an institutional investor, and, as the saying goes, no-one ever got fired for buying IBM – so, the larger, brand name managers get the cash.

The ability to support the next generation has certainly been constrained in the past three years. As can be seen from Tables 1, 2 and 3 below, fund of fund launches have been falling. We looked at data collected by 9AT from October 1st, 2023, through September 30th this year and compared that with the same time period in 2022-2023 and 2021-2022.

In 2023-2024, 1,487 funds of funds have been registered with the SEC, with a total gross asset value of $183.4bn; in 2022-2023, 2,437 fund of funds were registered with the SEC, worth a collective $311.2bn; and in 2021-2022, 2,923 products worth a collective $559.8bn were filed.  

In terms of the total GAV*, that is a reduction of close to 70% in just two years. 

Table 1: Fund of funds registered with the SEC, Oct 1, 2023 – Sept 30, 2024

Table 2: Fund of funds registered with the SEC, Oct 1, 2022 – Sept 30, 2023

Table 3: Fund of funds registered with the SEC, Oct 1, 2021 – Sept 30, 2022

September 18^th delivered some encouraging news, however, for the alternative investment industry, and fund of funds and emerging managers in particular. The 50 basis points cut by the US Federal Reserve, the first since 2020, could be the beginnings of the spark that the fund of funds space needs to begin to grow again.

There are challenges, of course. A common complaint about fund of funds from investors is that the fees are too high, and they need to ensure that any managers in their portfolio that don’t meet the hurdle rate are compensated for by those that do.

Overcoming those objections is part and parcel of running a fund of funds offering, and they will remain regardless of the prevailing interest rate environment. But it is not only the fund of funds themselves who will be hoping for an upswing in fortunes – budding Henry Kravis’s, Ray Dalio’s, and Michael Moritz’s will also have their fingers crossed. 

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