Research says funds of funds not just “multi-manager funds with extra fees”
May 13th, 2008 | Filed under: Hedge Fund Industry Trends
In a classic episode of Seinfeld, Jerry tries to buy a car from Elaine’s boyfriend “Puddy”. Puddy begins the negotiation by offering his friend Jerry a sweetheart deal. However, during the course of the half-hour episode, Elaine breaks up with Puddy and as a result Puddy’s goodwill all but dries up. As he revisits his original price quote, Puddy adds on a litany of dubious extra fees and charges that are probably familiar to many car buyers out there: ”undercoating“, “rust proofing” and the ultimate: the “optional overcharge“.
There are some in the hedge fund industry that look at the fees charged by funds of hedge funds as the equivalent to Puddy’s “optional overcharge“. However, a new study by one fund of funds supplier aims to dispel this notion once and for all. (Says Puddy: “Yeah. That’s right.”)
As hedge funds began to ride a wave of interest around the turn of the century, there seemed to emerge a general consensus among those new to the asset class that funds of funds were the most appropriate way to invest. The argument made a lot of intuitive sense as the idiosyncratic risk posed by hedge funds could be ameliorated through diversification. And so the fund of funds became a dominant species in Hedgistan.
But as we reported last week, there now seems to be a subtle shift back to single-strategy hedge funds. In fact, discussion about the potential weaknesses of funds of funds (fees, illiquidity of underlying funds and a lack of transparency into the underlying funds etc.) began a few years ago with the rise of the multi-strategy fund.
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