Hedge Funds of Funds: A Guide for Investors

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Conclusion

It's an oft quoted fact that hedge funds began in 1949, the first one being managed by an economist and journalist called Alfred W. Jones. However, hedge funds before the 1990s were something of a cottage industry and so were the hedge funds of funds that invested in them. Even back in the early 1990s, there was such a high barrier to raising assets and becoming a hedge fund manager that those who managed to do so invariably had amazing skill and edge. That made hedge fund selection a lot more straight forward than it is today. Furthermore, problems associated with hedge funds taking in too much money too quickly, and the detrimental effects on the hedge fund world of vast amounts inflows or outflows in a given strategy were just not issues. Since then there has been a dramatic growth in the sophistication, complexity, number, assets and impact of hedge funds in the world, resulting in a corresponding evolution of hedge funds of funds. Nowadays, hedge funds are viewed more as an asset class than just a bunch of clever investment techniques (although I would suggest that ‘asset class’ is a misnomer). With such demand has come increased supply, but the growth has resulted in a greater variability in edge, investment skill and returns; there are many ‘me too’ hedge funds where the existence of edge and experience is highly debateable that manage to raise capital purely on the basis of current hedge fund popularity. This forces hedge fund of funds managers to look a lot ...