The outlook for closed-ended funds of hedge funds looks gloomy as investors have turned their backs on the sector to focus on Ucits III funds and single-manager hedge funds.

A spate of wind-ups, two layers of fees and the arrival of competitive Ucits III funds are driving investors away from listed funds of hedge funds. The gravitational pull has become so strong that the sector is largely the preserve of arbitrageurs who are keen to “play” the sharp discounts the funds of hedge funds carry (their shares still trade at a 10-15 per cent discount to their net asset value) to make a quick profit, a clutch of industry watchers claim.