An article in hedgeweek asserts that funds of funds are “defying predictions of extinction” (link to article). Sounds like good news.

If anyone can provide a citation of such a prediction — that every fund of fund (FoF) would someday cease to exist — we’d like to see it. Who made that prediction? We think a strawman.

Swensen at Yale and others certainly think that FoFs add no value, and would probably like to see them join the fossil record. But whose prediction is the industry defying? Googling some relevant search terms just turns up more Internet articles in the same vein — articles discussing how this invisible “prediction” that the industry would cease to exist was so, so wrong. So a citation would help.

In any case, the degree of upheaval and change in the funds-of-funds industry has probably not been exaggerated at all. Or if so, by what measure? The article doesn’t say. Funds of funds clearly have “become one of the principal casualties of last year’s” market upheaval…

To measure the degree of change here, look at the steps these shops are taking to define new business models for themselves. Many FoFs are redefining the range of services they perform for both investors and managers. Also look at the sheer number of funds that have already closed down. (Wish we had fresher data on this but last time we checked — about two months ago — it was a significant percentage of the total — north of 15%. And that was only the second chorus of the redemption song.)

Here’s an idea for an article worth writing: Call ten FoF managers and ask them how they’re redefining their business models. Probe, question, discern any real trends, and write about it. Now that would be interesting. There’s a story there because the business model is undergoing radical change at many shops, and the people pushing for that change are generally product and market experts, and worth paying attention to.

That’s the good news: Not that the industry is defying some nonexistent prediction of its extinction, but that many in the FoFs crowd are real pro’s — they’ve seen it all, end to end, and they know how to pick up the pieces and play a pivotal role connecting managers and investors. Many will survive, many have already become part of the fossil record.

It doesn’t take a strawman to make this interesting. ♦