Funds of funds knocked flat by Madoff. But are they down for the count?
Aug 27th, 2009 | Filed under: Hedge Fund Industry Trends, Today's Post
By: Dr. Bob Swarup, AllAboutAlpha.com Editorial Board
Hedge funds of funds can be excused for feeling a little fragile these days. The last 18 months have seen them take a battering from investors and the media on all fronts from the hollow promises made by over-eager marketers to the strength (or lack) of their due diligence processes to those carefully explained and eminently justifiable extra layers of fees, all reaching their zenith with the Bernie Madoff fiasco.
As you can see from this chart in a report by Casey Quirk and Bank of New York Mellon, the dispersion of fund of funds returns this year has been unprecedented (lower line), despite the diversification they allege to practice: More…
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[...] Did Bernie Madoff kill the hedge fund of fund business? (All About Alpha) [...]
One should not be surprised by the outcome of events. A market disruption further made obvious the problem that plagued the investors side, and particularly among the fund of funds.
Reasons:
- many did not realize the fact that not all hedge funds deploy hedge fund strategies.
- the resources that hedge fund investors have deployed to evaluate and screen throughout this universe of hedge funds are for the most part young investment professionals with little or no experience, and indeed the actuaries; but worse, none with trading experience.
- the unfortunate fact that has transpired on the investor side reveals that the hedge fund investor community has deployed an inexperienced scouting pool that has far too often and grossly mistaken eloquence for competence. This has resulted in high rates of false-positive and false-negative diagnostics of hedge funds thus ensuing with the unfortunate headlines plaguing this industry; again, particularly fund of funds.