FEES ON FEES IN FUNDS OF FUNDS

Stephen Brown (), William Goetzmann and Bing Liang
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Bing Liang: University of Massachusetts at Amherst—Department of Finance and Operations Management, Amherst, MA 01003, USA

Chapter 7 in The World of Hedge Funds:Characteristics and Analysis, 2005, pp 141-160 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractFunds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund-specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of the fees paid by the investor. One would expect that the information advantage of funds of funds would more than compensate investors for these fees. Unfortunately, individual hedge funds dominate fund of funds on an after-fee return or Sharpe ratio basis. In this paper we argue that the disappointing after-fee performance of some fund of funds might be explained by the nature of this fee arrangement, and that fund of funds providers may actually benefit from considering other possible fee arrangements. These alternative arrangements will improve reported performance and may make funds of funds more attractive to a growing institutional clientele.

Keywords: Hedge Funds; Investment Analysis; Quantitative Analysis; Risk Analysis; Portfolio Analysis; Portfolio Returns; Risk of Hedge Funds (search for similar items in EconPapers)
Date: 2005
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Related works:
Working Paper: Fees on Fees in Funds of Funds (2009)
Working Paper: Fees on Fees in Funds of Funds (2009)
Working Paper: Fees on Fees in Funds of Funds (2004)
Working Paper: Fees on Fees in Funds of Funds (2003)
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