"Fees on fees hurt a lot more than they did when people were talking 10 or 15 percent annual returns," said Jim McCaughan, chief executive of PGI.
"When you're down in the 4, 5 or 6 percent annual returns, the extra fee makes a difference."
Survival Of The Fittest
Funds of funds are adapting to succeed in this new environment, with many offering bespoke accounts giving clients full transparency about what assets they are invested in.
Others, like Arden Asset Management and Franklin Templeton's K2 Advisors are tapping into the growing demand for new 'liquid alternatives' mutual funds, where an asset manager offers cheaper, more transparent access to top hedge fund trading strategies using liquid assets such as stocks and currencies.
And while many pension funds were still focused on making their own bets, others had tried and failed so were now prepared to use a fund of hedge funds, albeit at a lower price.
"While many investors had sought to go direct to underlying funds immediately after the financial crisis, a lot were now realizing it took enormous resource to monitor and construct portfolios that worked," said Aberdeen’s Global Head of Alternatives Andrew McCaffery.
For larger investors with $100-$200 million looking to use a separate managed account platform - a bespoke fund of funds - the management fee could be as little as 30 to 50 basis points, he said.
But while many fund of funds are aggressively pursuing a new business model, more are likely to go the way of Liongate.
"It's a very rough estimate, but I think anything under $1 billion for a fund of funds is going to struggle," said Marianne Scordel, founder of hedge fund consultancy Bougeville Consulting.