Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Fund of funds loss is gain for Blackstone, UBS

J. Tomilson Hill, Blackstone Group
Peter Foley | Bloomberg | Getty Images

Money managed by funds composed of hedge funds is down substantially, but a small group of top firms continue to consolidate market share.

Investors have been pulling assets from investment vehicles that allocate to hedge funds since 2008 when the financial crisis rocked performance and a small group were found to have placed money with Ponzi-schemer Bernie Madoff.

But the general pain has been a boon for the largest players in the space, including Blackstone Alternative Asset Management, UBS' A&Q Hedge Fund Solutions, HSBC Alternative Investments and Goldman Sachs Hedge Fund Strategies.

The combined $539.6 billion managed by the top 50 funds of funds at the start of 2014 is nearly 40 percent below the record $877 billion run in January 2008, according to Alpha's 2014 Fund of Funds 50 ranking. Though cumulative assets rose for the first time since the financial crisis—up $45.6 billion during 2013—53 percent of the additional capital came from growth at the top 10 firms, according to the Institutional Investor hedge fund publication.

The largest funds of hedge funds

Rank Firm/unit Firm/fund AUM ($B)
1Blackstone Alternative Asset Mgmt55
2A&Q Hedge Fund Solutions (UBS)26.6
3HSBC Alternative Investments25.6
4Goldman Sachs Hedge Fund Strategies24.9
5Grosvenor Capital Mgmt24.4
6Permal Group22.2
7Morgan Stanley Alternative Investment Partners18.6
8BlackRock Alternative Advisors18.1
9Pacific Alternative Asset Mgmt Co.15.7
10Mesirow Advanced Strategies13.5
12Amundi Alternative Investments11.7
13Aetos Alternatives Mgmt10.8
14Union Bancaire Prive Alternative Investments10.7
15J.P. Morgan Alternative Asset Mgmt10.6
16KKR Prisma10.1
17EnTrust Partners/EnTrust Partners Offshore10
18K2 Advisors9.8
19SkyBridge Capital II9.6
20Rock Creek Group9.6

Read MoreFollowing trends proving to be losing strategy

The top six firms retained their exact rank from a year ago.

Blackstone had by far the largest gain, increasing from $44.8 billion in assets under management to $55 billion as of Jan. 1. Blackstone notably opened its fund to retail investors in July with the Blackstone Alternative Multi-Manager Fund. The vehicle has gained 8 percent since then by investing in managers from Waterfall Asset Management, Two Sigma Advisors and Cerberus, among others.

World's largest hedge funds

Read MoreWanna work at a hedge fund? Go to these schools

"The distance between the haves and the have-nots within the fund-of-funds industry has widened since the financial crisis," Alpha noted in its summary of the new ranking.

"Debilitating capital outflows by liquidity-hungry investors in the immediate wake of the global meltdown wiped out the most-fragile firms and forced the survivors to scramble to appeal to other investors—no easy task. As hedge funds become more institutional, investors fed up with paying double-layer fees for anemic performance are becoming more comfortable with sidestepping funds of funds entirely and investing directly with single-strategy managers."

The InvestHedge composite index, which tracks fund of fund performance, gained 8.67 percent net of fees in 2013 and is up 0.59 percent this year through May. The annualized return since January 1998 has been 5.20 percent.

Read More Who's ruling the hedge world? You'll never guess

—By CNBC's Lawrence Delevingne.