Industry News
Funds of Funds Gain Fans
Lawrence C. Strauss
Barron's New York
April
2007
The two layers of fees charged by fund of hedge funds
may initially appear to be a deterrent for
investors.
Last year, according to Hedge Fund Research, nearly
US$ 50 billion of net new cash was invested in fund of
hedge funds, which is up from US$ 9 billion in 2005.
There are divergent views on how all of the new cash
being allocated into fund of hedge funds are affecting
fees. According to Greg Alien, director of Callan
Associates, "Fees have come down almost across the
board". Conversely, PerTrac Financial Solutions reports
that the average fund-of-funds management fee was 1.29%
last year, which was in line with every year going back
to 2000.
The author attributes the increase in fund of hedge
fund investing to the following reasons:
- Instant access to diversified and vetted portfolio
managers allow negative returns from one manger to be
compensated by a positive performing manager, as was the
case with Amaranth last year as there were plenty of
other holdings to offset the damage.
- Constructing a diversified a hedge fund portfolio
on your own is time consuming and costly. Financial
resources are better spent on accessing multi manager,
multi strategy funds to achieve diversification in a
cost effective manner.
- Access to mangers with proven track records that
may otherwise be inaccessible or closed.
Callan's Alien concludes that by considering the
above and appropriate fee levels, fund of hedge fund
investments can potentially pay for themselves.
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