Handbook of Hedge Funds

26

Funds of Hedge Funds

And at the end of the day, they all report to me!

A famous central banker

As we saw in the previous chapter, although hedge funds may offer some specific benefits, it is quite difficult and time consuming for an investor to just go out and hire a single hedge fund manager on his own. Significant barriers, such as the complexity of the evaluation process and the experience that is necessary to perform effective ongoing monitoring of the selected fund(s), will discourage most investors. Furthermore, given the high minimum investment requirements of individual hedge funds, direct investments have every chance of turning into concentrated portfolios (i.e. one to three managers), which are inherently poorly diversified and often highly illiquid. This explains why investors with time constraints, little experience or limited capital often prefer to gain access to alternative investments through funds of hedge funds to reach a proper diversification.

26.1 WHAT ARE FUNDS OF HEDGE FUNDS?

Funds of hedge funds (hereafter: funds of funds) do exactly what their name suggests: they allocate capital to several hedge funds. Investors buying shares in a fund of funds are not investing in a specific hedge fund, but acquire a proportionate share of ownership in a collective portfolio of typically 30 to 60 hedge funds.

Although funds of funds may appear innovative for most investors, it is not really a new concept. Rothschild Capital Management started Leveraged Capital ...