Fund of hedge funds, Financial Management

Fund of hedge Funds

The universe of Fund of Funds (FoFs), often referred to as Fund of Hedge Funds, continues to grow from Year 2000, both in absolute terms and as a relative component of Hedge Funds. FoFs currently account for well over one third of the Hedge Fund industry. Most of this growth has remained in the US and the UK. In the rest of Europe, it is the fastest growing investment product. One of the main reasons of this growth is its ability to offer investors access to Hedge Funds that are closed long back and invest after regress due diligence process.

What is Fund of Funds or Fund of Hedge Funds?

Fund of Funds are portfolios of Hedge Funds offering small investors with minimal investment exposure to a wide range of alternative Hedge Funds investment styles and strategies. FoFs generally allocate capital to 15-30 Hedge Funds to achieve efficient risk diversification; this feature also attracts institutional investors to invest in FoFs. Nevertheless, a smaller number of Funds may be used to concentrate capital on a particular strategy. Such FoFs aim to post high returns and are more concerned with event risks. However, FoFs manager investment style can be classified as below:

Conservative

FoFs classified as conservative have two characteristics. First, it seeks for consistent returns by primarily investing in funds that have conservative strategies such as equity market neutral, fixed income arbitrage and convertible arbitrage, and secondly exhibits a lower historical volatility than the average FoFs' composite Index. A conservative FoFs generally shows consistent performance regardless of market conditions.

Diversified

Here, the FoFs manager creates a "diversified" portfolio of various Hedge Funds with a balanced risk posture. Many Fund of Funds utilize a multi-strategy approach, which includes both aggressive and conservative Hedge Funds without specific importance to any single Fund.

Market Defensive

Market defensive FoFs invest in funds that generally engage in short-selling bias strategies and managed futures. The portfolio shows a negative correlation to the general market benchmarks and shows higher returns during market decline.

Strategic

The strategic FoFs generally engage in investing more opportunistic strategies such as emerging markets, sector specific, and equity hedge with the motive of creating superior returns for investors. These funds exhibit a greater dispersion of returns and higher volatility compared to FoFs benchmark.

Economic Terms

One important item in Hedge Fund industry is the Hedge Fund fee structure, which is a key distinguishing feature of Hedge Funds from other investment alternatives. Hedge Funds always have a fee structure that includes both a management fee and an incentive or performance fee. The management fee usually ranges between 1 percent to 2 percent of assets under management and the incentive fee between 15 percent and 25 percent of upside performance. Most Hedge Funds follow the "2 and 20" rule - a 2 percent annual management fee and a 20 percent annual performance fee. This fee structure creates serious incentive for portfolio managers to generate positive returns. If they can't, investors only have to pay the management fee until the Fund's provide profit.

 

Posted Date: 9/11/2012 2:19:50 AM | Location : United States







Related Discussions:- Fund of hedge funds, Assignment Help, Ask Question on Fund of hedge funds, Get Answer, Expert's Help, Fund of hedge funds Discussions

Write discussion on Fund of hedge funds
Your posts are moderated
Related Questions
ON THE BASIS OF FLEXIBILITY • Fixed budget: this is designed to stay unchanged irrespective of the volume of output or turnover attained.  The budget remains unchanged over

Define the basic motivations for a counterparty to enter into a currency swap.  Answer:  One major reason for a counterparty to enter into a currency swap is to exploit the comp

You are required to choose a company for analysis. This company should be quoted on one of the principal international exchanges. It may be your own company. You should then do the

What is the basic goal of a business? The primary financial goal of the business organizations is to maximize the wealth of the firm's owners.  In turn Wealth refers to value.

What problems can take place into the capital budgeting analysis if project debt is evaluated in place of the borrowing capacity created by the project? If project debt is grea

Q. Show objections against profit maximization? 1) Profit cannot be ascertained well in advance to express the. Probability of return as future is Uncertain. It is not at all p

Convertible bonds are the debt instruments issued which can be converted after a pre-specified date for a pre-specified number of securities (generally equity stock). I

The United States of America issues US Treasuries, which are negotiable government debt obligations. They are popular because they are backed by the full

The graphical representation of the relationship between yield and maturity is known as yield curve. Yield curve risk is the risk of experiencing an adverse

Q. Working capital cycle? In a manufacturing concern the working capital cycle is start with the purchase of the raw material and ends with the realization of the cash from the