Tactical Portfolios: Strategies and Tactics for Investing in Hedge Funds and Liquid Alternatives

CHAPTER 3

How to Approach Investing in Hedge Funds: Investment Structures

In this chapter, we will consider the various structures and avenues available to investors who wish to invest in hedge funds. For potential investors, there are a variety of ways to access managers and each option carries with it somewhat unique due diligence requirements.

ALLOCATION TYPES

Single Allocation

The most straightforward way to invest in hedge funds is to make that first initial allocation to a manager. Single manager hedge funds generally have a minimum investment requirement to get started. Single allocations are typically the domain of ultra-high net worth investors or family offices who are willing to invest the time and due diligence into one person. Often, they will already know this person or come to them through a personal network. Many emerging manager allocations are done this way. For others, single allocations can take a fund from emerging to established if a manager's personal network is solid enough.

Funds of Funds

Funds of funds are the granddaddy of hedge fund investing. In the early years, they ruled the roost when it came to allocations, outpacing family offices. Then, when institutions got into the mix fund of funds hit their peak, that is, until the largest institutions got smart enough about alternatives to invest on their own. So what is a fund of funds?

For our context, funds of funds are basically big pools of smaller hedge funds. The investment team at a fund of funds ...