The Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry

CHAPTER 6

Funds of Hedge Funds

 

 

 

 

In my previous chapters, I have tried to outline the expertise and the training required to become a hedge fund manager and the complex nature of the hedge fund strategies. I have also shown the level of due diligence required, not just at the onset of the investment but also on an ongoing basis, to ensure the safety of your investment in a hedge fund. Furthermore, I have tried to illustrate the type of due diligence to be expected from auditors and regulators and how at the end of the day it is the investors’ responsibility to engage the proper trading and risk management professionals to stay on top of their hedge fund investments. While a few investors do invest in hedge funds directly through their own due diligence, a vast majority of them outsource the due diligence and investment decisions to hedge fund professionals like the funds of hedge funds. According to the Alpha magazine, nearly 40 percent of all hedge fund assets are with the fund of hedge funds, which have been trusted with the task of investing in hedge funds. The fund of funds industry has failed at this fiduciary responsibility. In this chapter, I plan to illustrate the philosophy and mechanism used by the funds of funds in making their investment decisions and how it is flawed and needs to be radically altered.

PHILOSOPHY AND SERVICES

To understand the philosophy and the services offered by a fund of hedge funds, I went to the website of two of the oldest and the largest ...