Selecting an appropriate product or mandate and benchmark can be as important as selecting the right hedge fund of funds manager and needs to have some thought given to it. Below, I run through the considerations that need to be taken when defining your needs within the hedge fund space and selecting an appropriate product or mandate and then constructing an appropriate monitoring methodology and benchmark.
Alongside the selection process for a hedge fund of funds manager you should also be thinking about product and mandate. If the type of hedge fund of funds/mandate that is needed is niche (i.e. not multi-strategy) then the search needs to be restricted to hedge funds of funds managers with that given skill set and, obviously, if you want to invest in an existing product rather than a bespoke portfolio then you will require that product to already be managed by the hedge funds of funds manager. For example, if you wanted a bespoke mandate that was market independent you would probably only want to focus on hedge fund of funds managers that run products or existing mandates in that area.
Hedge funds can be used to produce a range of return streams from producing ‘shoot the lights out’ style big returns through to steady and involatile ‘cash +’ style returns. Some examples of this in practice can be seen as follows: