(HedgeCo.Net) The “fund of hedge funds” (FoHF) segment remains a meaningful part of the industry, but is evolving rapidly in response to changing investor preferences and market dynamics. A recent report from Citco highlights several key trends shaping this sector in 2025. Citco
Trends identified
- Tailored allocation: Rather than broad-based exposure, many FoHFs are targeting niche or specialised hedge-fund strategies to stand out.
- Fee compression: Investors expect more value, leading FoHFs to reduce fees or align more closely with underlying fund performance.
- Transparency & liquidity demands: Investors increasingly seek clarity on underlying funds’ holdings, fees, liquidity terms and strategy risk.
- Manager scale vs agility tradeoff: Large multi-strategy hedge funds are facing scepticism while smaller, more nimble managers are gaining interest.
Why this matters
FoHFs serve as a gateway for investors to gain diversified hedge-fund exposure without picking individual strategies. But as the industry matures, FoHFs must offer distinct value — e.g., access to emerging managers, alternative fee structures, bespoke overlays — rather than simply providing “funds of funds” replication.
The path ahead
- FoHFs that embrace manager-selection, provide operational transparency and adapt fee models are likely to thrive.
- Those that remain “old-school” (large, expensive, slow to adapt) risk losing relevance.
- For allocators, FoHFs may increasingly serve as a tactical allocation vehicle (e.g., to capture a niche strategy) rather than long-term core exposure.