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Funds of Hedge Funds |
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A fund of hedge funds is a investment pool that consists of individual hedge funds.
Sometimes the fund of hedge funds is called a hedge fund of funds. Why would someone create a fund of hedge funds when individual hedge funds already exist? Who might want to invest in funds of hedge funds? 1) Individual hedge funds usually require very a high minimum amount to invest in the hedge fund. If a fund of hedge funds is created the fund of hedge funds can charge a smaller initial amount to invest in the fund. So a smaller investor who might not be able to invest in an individual hedge fund because of the high initial amount, could invest in a fund of hedge funds. 2) Certain investment companies specialize in monitoring hedge fund managers. They are in a unique position to create funds of hedge funds with certain risk/reward profiles. Therefore they can capitalize on this fact and create funds of hedge funds to sell to investors. 3) A large investor who might have enough money to enter only one hedge fund, might instead want to place this money into a fund of hedge funds so that he had more diversification. The criticisms of funds of hedge funds are as follows: 1) High fees on top of already high individual hedge fund fees. The hedge funds composing the funds of hedge funds usually charge fees of between 1 and 2% of assets managed and incentive fees of 15–25% of profits generated. The funds of hedge funds typically add additional fees of 1% of assets managed and 10% of profits generated. 2) Returns of funds of hedge funds that have been criticized as crowd-following and matching indexes, and not independently seeking opportunities. 3) Funds of hedged funds have been criticized as annoying to the underlying hedge funds as having a short-term view. Some hedge funds have refused to take money from funds of hedge funds. At Aegean, we have a good knowledge of funds of hedge funds companies as well as individual hedge fund companies. We can offer you prudent advice in this area. |
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