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Hedge Funds of Funds: A Guide for Investors by Chris Jones

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5

Core Functions and Capabilities of Hedge Funds of Funds

5.1 OVERVIEW

There are many different approaches to investing with hedge funds and hence there is a variety of different types of investment process used by different hedge funds of funds.

For example:

  • Some hedge funds of funds are biased towards past performance and track record and will spend more time performing quantitative analysis of past performance and this will predominate within the investment process.
  • Some funds will be more inclined to do qualitative analysis and take a forward looking view gained from analysing the investment process and finding an edge; here past track record will play a lesser role in the investment decision.
  • Some hedge funds of funds may invest across a wide range of hedge funds thus diversifying away much single hedge fund manager risk from individual hedge funds.
  • Some hedge funds of funds will want to give concentrated access to what they think are the best hedge funds thereby having more single hedge fund manager risk and having to spend more time on risk management.

As a result, there is a degree of subjectivity involved in assessing hedge fund of funds investment and risk processes as different potential investors in hedge funds of funds will resonate better with certain biases within the processes. However, there are core functions that need to be practiced by all good hedge funds of funds to ensure that an investment process is rigorous, effective and repeatable; and there are core ...

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