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

Organizational Structure of Fund of Funds

The typical fund of fund organization has a CIO, CEO, COO, or CFO, a director of marketing or investor relations, a head of risk management, and a team of research analysts who are supported by the firm's legal, operations, and accounting staff. The founder in most cases is the CIO; however, in some cases, the founder may have a markets, research, or even an investor relations and marketing background.

An FoF generally does not trade any securities or participate in the markets. The entire business model is normally based on picking people who can and do trade securities for a living and who can manage risk. It is not common for an FoF to use overlay strategies or perform hedging transactions that seek to hedge or cancel exposure to any one manager or strategy, although some do so.

Smaller FoFs that were in business prior to the 2008 market crash were able to organize the entire business around a single founder who was the sole owner of the firm and CIO/CEO. These smaller FoFs managed under $1 billion in assets and were quite common prior to 2007, given the relatively low start-up cost and lack of barriers to entry to start an FoF. Under this model, the CIO was often also the firm's only portfolio and risk manager, and many firms did their own fund accounting and administration. Firms often lacked robust infrastructure, technology, and disaster recovery relative to traditional asset manager organizations and hedge funds themselves.

Since ...