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
Geographical Classification of Mutual Funds : Nations' boundaries provide territorial restrictions on the sale and purchase of mutual fund units or shares as is the case in com

paid-up equty 100000 earning of the company 10000 praice - earning ratio(PIE) 20 no.of equty share

Determine the Valuing Equity Securities Unlike debt and money market instruments, equity instruments represent ownership interest in the company. As owners should put in their

Explain the four fundamental rights of ownership A shareholder, by virtue of being an owner, is generally entitled to four fundamental rights of ownership: 1. Claim on a sha

Types of Warrants The warrants can be classified into different types. They are: Detachable Warrants These warrants are issued with most debentures, like convertible o

For capital budgeting decision which cost is relevant For capital budgeting decision, composite cost of capital is comparatively more relevant albeit the firm may finance one p

What are the options available for growth Joint venture   A joint venture is when a separate company is formed, in which every member holds an equity st

Should a firm hedge?  Why or why not? Answer:  Firms may not need to hedge exchange risk in a perfect capital market. But firms can add to their value by hedging if markets are

Five Cs of Obtaining Credit The five crucial parts lenders examine previously issuing credit include: 1. Character.    This is a calculation of the borrower's integrit

DIVIDEND POLICY Dividends provide the portion of a firm's net earnings which are paid out to the shareholders. the objective of financial management of maximizing the share