Fund of funds
A fund of funds is one kind of hedge fund. This is why is named: a fund of funds selects and manages a diversified portfolio of funds so that it sells to wealthy individuals or institutions. A good analogy of fund of funds is the ETF concept: a manager picks a pool of stocks to form an ETF and sell to investors. Fund of funds are targeting to those whose don't manage complicated asset allocations themselves.
The selected funds in fund of funds portfolio can vary from different flavor, for example, growth versus value, long versus short, and many other more. Fund of funds employ sophisticated techniques to filter value by allocating asset among fund classes. Besides quantitative measures on funds, they also monitor whether their fund managers working with them are lagging behind and emotional drifts.
Fund of funds charges 1 to 1.5% of asset as management fee, in addition to that 1% of profit. Since fund of funds also needs to pay their funds 20% fee, the cost is significant on investor side. For example, if return before any fee is 20% a year, the funds need to take out 20% of the profit, that leave 16% net profit. Then there is a 1.5% of asset fee. This is translated to 14.5% net profit before fund of funds' fee. After all of these been taken care of, the effective return is 11.7%. Double fees are the big drag in return.
Also because of the double fee structure, fund of funds are working pretty aggressive to whip their funds work even harder. Not only their own performance but also funds' performance under them are under closely scrutiny. Fund of funds knows when to switch horse, especially a series of luck hit a manager, it is time to bail out and gear in to another who had lost in a row.
Even with such double fee structure, fund of funds can still recruit large institutions like pension funds. Because pension funds don't have the ability to manage funds themselves but they have to maintain stability and return in the long haul. Fund of funds meet these two basic requirements by having an analytical layer between pension funds and broad range hedge funds. It becomes more efficient. To some extent, fund of funds may be considered a substitution of fixed income products.
The selected funds in fund of funds portfolio can vary from different flavor, for example, growth versus value, long versus short, and many other more. Fund of funds employ sophisticated techniques to filter value by allocating asset among fund classes. Besides quantitative measures on funds, they also monitor whether their fund managers working with them are lagging behind and emotional drifts.
Fund of funds charges 1 to 1.5% of asset as management fee, in addition to that 1% of profit. Since fund of funds also needs to pay their funds 20% fee, the cost is significant on investor side. For example, if return before any fee is 20% a year, the funds need to take out 20% of the profit, that leave 16% net profit. Then there is a 1.5% of asset fee. This is translated to 14.5% net profit before fund of funds' fee. After all of these been taken care of, the effective return is 11.7%. Double fees are the big drag in return.
Also because of the double fee structure, fund of funds are working pretty aggressive to whip their funds work even harder. Not only their own performance but also funds' performance under them are under closely scrutiny. Fund of funds knows when to switch horse, especially a series of luck hit a manager, it is time to bail out and gear in to another who had lost in a row.
Even with such double fee structure, fund of funds can still recruit large institutions like pension funds. Because pension funds don't have the ability to manage funds themselves but they have to maintain stability and return in the long haul. Fund of funds meet these two basic requirements by having an analytical layer between pension funds and broad range hedge funds. It becomes more efficient. To some extent, fund of funds may be considered a substitution of fixed income products.
posted by Intl.investment.services at
10:50 AM
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