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http://hdl.handle.net/2451/26807
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| Title: | Fees on Fees in Funds of Funds |
| Authors: | Brown, Stephen J.
Goetzmann, William N.
Liang, Bing |
| Issue Date: | 14-Jun-2004 |
| Series/Report no.: | S-DRP-04-01 |
| Abstract: | Funds 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. |
| URI: | http://hdl.handle.net/2451/26807 |
| Appears in Collections: | Derivatives Research
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