In defence of hedge funds of funds

Funds of funds, particularly hedge funds of funds, have suffered outflows in recent years as pension funds reassessed their cost alongside risk and return characteristics. The conventional wisdom is that all types of FoFs are at death’s door.

But according to a research report by Steven Hall and Jack Gray (pictured) of Australian alternatives firm Brookvine, “conventional wisdom is always conventional, occasionally wise and oftentimes wrong”.

Their report says that investors should compare the cost of FoFs, including the base and carry, and agency costs, with both the direct costs of building a portfolio yourself and the indirect opportunity costs of the consequences of inadequate skill, temperament, experience and networks.

“Only a modest number of hedge FoFs and US endowments have the ‘right stuff’ needed to successfully craft and implement a portfolio of hedge fund strategies,” the report says.

Click here to read the full report

Sponsored Content

One response to “In defence of hedge funds of funds”

Leave a Comment

GIC, Temasek eye trillions of growth in climate adaptation market

GIC, Temasek eye trillions of growth in climate adaptation market

Singapore’s two largest asset owners, GIC and Temasek, see attractive opportunities in climate adaptation solutions – a relatively underfunded area compared to decarbonisation. The former has already made selective adaptation investments and said the opportunity set across public and private debt and equity could increase to $9 trillion by 2050.

Sort content by

Fund manager contracts and financial markets’ short-termism

This paper investigates the extent to which the delegation of funds management prevents long-term information acquisition, inducing short-termism in financial markets. The authors, Catherine Casamatta and Sebastien Pouget also study the design of long-term fund managers’ compensation contracts. Under moral hazard, fund managers’ compensation optimally depends on both short-term and long-term fund performance. Short-term performance

Sovereign Development Funds: designing strategic investment institutions

The hunt for alpha is leading traditional investors toward more innovative strategies and operating models. And, significantly, one potential source of inspiration for long-term investors has come from an unconventional place: the community of sovereign development funds (SDFs). In this paper academics from Stanford University provide readers with analytical frameworks that can assist in the

Capitalising on institutional co-investment platforms

Co-investment is often perceived as referring to institutional investors investing alongside their external asset managers in companies, but increasingly it refers to investment responsibilities being shared among peer investors, as long-term institutional investors are forming co-investment partnerships with the specific objective of deploying capital collaboratively into attractive investment opportunities. These collaborative partnerships seem to be an

State pension funds tilt towards politically-connected stocks

It is well documented that local bias exists in US state pension fund holdings, but now an article in the Journal of Financial Economics (forthcoming) finds evidence not only of local bias, but bias towards politically-connected stocks.  Not only that, but the article finds that political bias is detrimental to fund performance. “Political bias is

The power of knowledge management

Funds management is often discussed in the context of it being part art and part science, however most of the literature centres around the science, the finance, of funds management. The premise of active management is that skills and knowledge are paramount to capturing excess returns above the benchmark. But despite this premise, little is

Worldwide diversity in funded pension plans

There is a huge diversity in pension system design across the globe, reflecting historical, cultural and institutional diversity. There is much to be learned by each of the different systems, so in order to compare the benefits of various systems, two authors from APG in the Netherlands postulate a new classification of four role models

Previous