Hedge Funds of Funds
Hedge funds of funds, also known as just funds of funds or fof are on the surface one of the best ideas to ever come to the hedge fund world. Of course like a lot of things once you look under the hood things dont look quite as good, and in some cases things look plain old scary.
The idea behind a funds of funds is that you will invest with a manager who is good at investing with other managers. Essentially they are doing the same thing as a financial advisor who picks your mutual funds for you to build the ideal portfolio. Well guess what? Most financial advisors suck and consequently so do most fund of funds.
Most funds invest in everything and try and spread the risk around to several strategies. Others invest in one area of the hedge fund world like global macro trading funds or statistical arbitrage in order to build and index like portfolio.
So where do most of these funds go wrong? Is it any surprise that they mess up by charging exorbitant fees? They will charge not just a percentage of assets under management but an incentive fee on top of the hedge fund fees. With this extra layer it becomes a lot harder to not suck.
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