Fund of Funds Investing: A Roadmap to Portfolio Diversification

Chapter 14. How Fund of Funds Source Managers

Finding hedge fund managers for inclusion in a search for a potential investment by the fund of funds manager is a labor-intensive process, one that is underestimated by many. One of the first paths is for the research team to sift through the various databases and look for manager profiles that meet the investment parameters of the fund. Size, length of track record, performance results, and strategy are key ingredients for a "first cut" to determine whether a telephone call with the hedge fund is warranted and whether it is worthwhile to take the time to gain further understanding of the strategy.

WHERE MANAGERS COME FROM

Depending on the outcome, an on-site visit may occur next in the research process, if the manager believes that the hedge fund strategy is consistent with his or her fund's objectives.

Another starting point is the prime brokerage community. This is because hedge funds depend on the services of the prime broker. The prime broker offers a wide range of services for the hedge fund, including executing transactions, providing daily and monthly portfolio analytics, providing financing of securities positions through margin, and in some cases, actually providing office services and office space, including telecom, Internet, and Bloomberg access. One of the hallmarks of the prime brokers is to introduce hedge fund managers to a wide range of institutional, family office, and high net worth investors globally.

Montgomery Securities' ...