Troubling times for high fee "concierges" In early 2008 Union Bancaire Privée was the world's biggest investor in hedge funds. The bank - a polished and publicity-shy member of the Swiss financial scene run by the de Picciotto family since being founded in 1969 - had $55bn channelled into the then booming industry. Its fund of funds business, through which its private clients invested together in vast portfolios of hedge funds, was the toast of Geneva, rivalling the size of its regular banking operations. After investing a fraction of that client money in funds linked to Bernard Madoff, the disgraced architect of a decades-long Ponzi scheme, UBP's asset base began to shrink dramatically. Now the bank has less than $15bn in its fund of funds business and has undergone a significant reinvention, the fruits of which have still to be seen. UBP's experience is far from singular. Late last month, EIM, the Swiss-based fund of funds run by Arpad "Arki" Busson, sometime fiancée of Uma Thurman and the hedge fund industry's most glamorous son - was reported to be up for sale. EIM, like UBP, has seen assets dwindle after losing money to the Madoff fraud. And perhaps more significantly, talk of EIM's potential sale came on the heels of the actual sale of FRM , one of Europe's longest-running fund of funds, to Man Group for just $1. Amid such recent headlines, the future of the battered funds of funds industry - which once accounted for as much as two-thirds of all investments in hedge funds worldwide - is coming under scrutiny. According to Hedge Fund Research, funds of funds now make up only a third of the hedge fund industry's $2tn investor base. And many believe that is bound to shrink further. "The fund of funds industry is going to collapse down to four or five big guys at the top," says Jane Buchan, founder of Paamco, a $16bn fund of funds - one of the biggest. It is an industry you can't do cheaply," Ms Buchan adds. There are big economies of scale. Size, though, is a blessing and a curse. For fund managers like UBP, EIM and FRM, the cost of maintaining large operations on significantly diminished asset bases is a heavy burden. EIM's potential sale has been precipitated precisely because Mr Busson has concerns over maintaining the quality of the company's large operations if it continues to go it alone. Likewise, the sale of FRM was pushed by one of the fund's major investors, Japan's Sumitomo, people familiar with the deal have said. The real challenge is not just stabilisation, however, but overhauling a defunct business model. Funds of funds also mean fees on fees - extra charges investors turned a blind eye to when the industry was booming but have since become extremely wary. The average fund of funds charges 1 per cent of assets invested and 10 per cent of profits in addition to the 2 and 20 the managers it invests in charge. "Fund of funds were selling access up until the financial crisis," explains Jeff Holland, managing director at Liongate Capital a $4bn fund of funds based in London. "The veil was lifted after investors suffered problems of liquidity in 2008 and from a realisation that many of them did not know what hedge funds actually were," he adds. The days of funds of funds acting as high fee "concierges" to the hedge fund industry are over: hedge funds" money no longer flows from Swiss private banks, but instead comes from US pension funds and other institutional investors, the needs of which are very different. "What they want fund of funds to do for them is to augment their existing portfolios - that's where the most sophisticated institutions are going," says Mr Holland. Nimble, bespoke portfolios of niche managers are the order of the post-crisis industry. And funds of funds that can provide such services are adamant they have a successful future. We want to get away from the old fund of funds model. The value of fund of funds should be find the best managers and to maximise alpha," says Alex Allen senior portfolio manager at $5bn fund of funds Sciens Capital. "We have cut the number of funds we have in our portfolio," he says. Sciens" portfolio is built from a maximum of 20 smaller, emerging hedge funds, compared with more commonplace industry portfolios of anywhere above 40. Paamco, likewise, is focused almost entirely with smaller, emerging managers, though it only invests through segregated managed accounts, which give it greater control and allow its chosen managers to be bolder with their risks. One account that Paamco allocated to outperformed the mainstream equivalent run by the same manager by 10 percentage points last year, according to Ms Buchan - an example of the value she says her group's efforts and expertise can add. She says technique is as important as knowledge: "Funds of funds have to offer genuine value propositions, and what really matters is how you implement your investments." Such managers do not see themselves as being locked in a declining industry. According to a survey by Citigroup, the hedge fund industry could double in size over the next four years. At such a rate of growth, even if fund of funds saw their share of allocations from investors continue to slip, the industry would still grow significantly. "I wouldn't call that a bleak future at all," says Mr Holland.