Below please find a definition of “Fund of Hedge Funds”
Fund of Hedge Funds: There has been a lot of talk over the last 2 years and 2 quarters particularly about the death of fund of hedge funds (fofs). Like much other doomsday discussions regarding the hedge funds I don’t see these fund of funds going anywhere. In fact, I still think there is room for further growth in the fund of fund arena as demand from internationally-based investors is increasing as most fund of funds are still currently designed for U.S or EU investors.
The main reason why I think hedge fund of funds will be always be around is that many investors have just enough assets to play around in hedge funds. This requires them to either allocate their funds to a friend or close business partner who runs a single strategy fund or diversify their entry to the hedge fund market by investing in 3-12 hedge funds at one time. Some of the most popular retail products these days are all in one portfolios whether they be lifestyle portfolios, all cap separate managed account products, or retirement focussed growth & income mutual funds. Many investors would rather pay an extra layer of 1% fees in return for a no hassles lower risk exposure to the hedge fund industry.
Another reason why fund of hedge funds will be around for a long time is that 55% of all fof assets are from institutions. The percentage of fund of funds used in a institutions total portfolio is on the rise, not the decline. This class of investors generally takes a longer view than high net worth individuals or family offices. It would take several catastrophic events in consecutive quarters or years to stall or create a small decline in the institutional use of hedge of funds.
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