With investment confidence in them rising, European fund of hedge funds (FoHF) are gaining momentum, but the industry and its growing investor constituencies still face several challenges reports Fitch Ratings. The report said, 'Investors are increasingly viewing FoHFs as a valuable investment to achieve absolute returns, noting that they offer a high degree of diversification.'

Fitch expectation of continued growth in FoHFs, stems mainly from increasing participation of institutional investors, and an evolving European regulatory environment trending towards quasi-retail onshore status for FoHFs. While the challenges facing FoHF managers include differentiation of business models between managers offering controlled access to hedge funds and those targeting high returns. Other challenges include managing size-related issues, downward pressure on fees and investor expectation of more favorable subscription and redemption terms. .