LONDON (Reuters) - Aviva (>> Aviva plc) will shut its unit that invests in external hedge funds, the British insurer said on Wednesday, joining a growing number of so-called fund of hedge funds to have closed shop or merged with rivals as clients cut out the middleman.

The U.S.-based Hedge Fund Investment Team of Aviva manages about $2 billion.

Aviva did not disclose the actual date of closure.

The retreat comes as Aviva targets a possible deal to buy rival Friends Life (>> Friends Life Group Ltd) for 5.6 billion pounds ($8.8 billion) as British pension reforms put pressure on insurance companies to find new business.

Once a thriving source of capital for hedge funds, fund of funds, which try to reduce risk by holding a number of funds, have been criticised for adding another layer of fees. Some of them failed to protect investors from convicted fraudster Bernard Madoff's Ponzi scheme.

While the global hedge funds industry has grown to manage about $3 trillion since the financial crisis in 2008, the number of fund of hedge funds has shrunk by about 30 percent and their assets have declined by 16 percent to $672 billion, according to data from industry tracker HFR.($1 = 0.6358 British Pounds)

(Reporting by Nishant Kumar and Carolyn Cohn; editing by Freya Berry and Louise Heavens)

By Nishant Kumar

Stocks treated in this article : Aviva plc, Friends Life Group Ltd