Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Funds of Funds

A fund of hedge funds offers investors a mix of global macro, equity, and fixed-income strategies. An FoF can be created and offered to investors to capture a wide range of hedge fund styles, or it can be customized to offer specific types of sector, geographic, or life cycle categories of hedge fund managers and products. The most popular form of FoF investing has been the multistrategy FoF, created by investing in a broad universe of underlying hedge funds and the maximum number of strategies possible.

More recently, there has been an explosion in specific FoFs designed to capture equity or fixed-income or credit managers, global macro managers, early-stage managers, or emerging market managers. Regardless of focus, the FoF is using its research capability and manager relationships to create standard products that can be used by investors to capture exposure to hedge funds without having to set up their own due diligence and research process to select individual managers. Once investors have done their homework on the FoF operator, they can sit back and rely on the FoF to make the decisions around manager selection and strategies.

A typical FoF pitches itself to investors as a proven model to gain immediate access to a wide range of hedge fund exposure:

At ABC fund of hedge funds we create diversified portfolios of hedge fund exposure that are designed to minimize risk and maximize return. We start with a set of investment objectives and risk tolerances and then ...