Functions FoF
Portfolio Construction
Performing DD
Manager Selection
Investment Monitoring
Benefits FoF
Diversification
Low minimum investments
Economies of scale
Informational advantages
Liquidity
Access to closed funds
Reduced fees
Regulatory protection
Currency hedging
Leverage
Educational role
Disadvantages FoF
Double layer of fees
No fund netting
Tax consequences
Lack of transparency
Cash flow effects of other investors
Less control
Value-Add FoF
Strategic Allocation
Tactical Allocation
Benefits PE FoF
Enhanced Diversification
Access to top managers
Offer education to new investors
Differences in PE FoF
Portfolio construction
Geographic focus
Strategic focus
Categories PE FoF
Primary FoF -> primary commitments
Secondary FoF -> secondary markets
Three Phases PE Construction
Portoflio Construction
Fund Selection (incl. 15-50 funds)
Monitoring
4 Key Advantages PE FoF
Professional management
Enhanced access
Lower capital commitments
4 Key Disadvantages PE FoF
Loss of GP connection
Less transparency
Lack of liquidity
4 Factors driving interest in PE FoF
Ease of accessing PE funds
Better opportunities
Complement existing PE program
Reduced ODD
Historical Performance of PE FoF
PE FoF outperform broad market
Reduced return dispersion
VC FoF highest dispersion reduction
Definition FoHF
Diversified investment pool managed by single manager
15-20 HF to optimize diversification -> vol similar to FI
FoF Selection Process
Quantitative Screening Process -> identify characteristics and track record (reduce to 500 funds)
Due Diligence -> initial meetings (reduce to 100-200 funds)
On-site visits -> meet staff & determine skill (reduce to 10-50 funds)
Two / Three Major Advantages FoF over Single Managers
Access to best managers
Reduce idiosyncratic risk (manager risks)
(Size -> offer liquidity facilities to bridge subscriptions & redemptions)
Returns FoF
Underperform broad hedge fund indices
Results misleading due to less bias (survivorship & selection bias)
WHy FoF Returns are Less Bias
Retain returns from liquidated funds
Reduce instant history bias
Use actual weights
Seeding Funds
Invest in new funds to obtain transparency and capacity
Gain stake in fund
Provide expertise, infrastructure and network
Costs of FoF
Double layer of fees (asset & performance fee of two managers)
DD costs
Subscription costs to databases
Compensation packages
On site visits
Minimum investment size (underlying cost)
Advantages Hedge Fund Liquid Alternatives
Lower minimum investment
Lower fees
Greater transparency
Less risk
Outperform ‘40 Act funds
Disadvantages Hedge Fund Liquid Alternatives
More regulation
Less flexible
Lower returns
Regulation Bodies Hedge Fund Liquid Alternatives
UCITS -> Europe
‘40 Act funds -> US
Equity & Multi as largest strategies
UCITS Hedge Fund Liquid Alternatives
Leverage up to 200% of NAV
Restrictions in PE, RA, Commodities
Limits asset concentrattion in single categories
‘40 Act Funds Hedge Fund Liquid Alternatives
Regulates leverage and diversification
Regular liquidity
Symmetric performance fees
Historical Performance: Market Defensive FoF
Average return
Low volatility
Sharpe: 0.4
Low skew & kurtosis
Historical Performance: Conservative FoF
Low return
Sharpe: 0.3
Historical Performance: Strategic FoF
Sharpe: 0-2
Negative skew & positive kurtosis
Downside risk
Historical Performance: Diversified FoF
Negative skew & positive excess kurtosis
Last changed6 hours ago