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Fees On Fees In Funds Of Funds

In: The World Of Hedge Funds Characteristics and Analysis

Author

Listed:
  • Stephen J. Brown

    (NYU Stern School of Business, New York, NY, USA)

  • William N. Goetzmann

    (Yale School of Management, International Center for Finance, New Haven, CT 06520-8200, USA)

  • Bing Liang

    (University of Massachusetts at Amherst—Department of Finance and Operations Management, Amherst, MA 01003, USA)

Abstract

Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund-specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of the fees paid by the investor. One would expect that the information advantage of funds of funds would more than compensate investors for these fees. Unfortunately, individual hedge funds dominate fund of funds on an after-fee return or Sharpe ratio basis. In this paper we argue that the disappointing after-fee performance of some fund of funds might be explained by the nature of this fee arrangement, and that fund of funds providers may actually benefit from considering other possible fee arrangements. These alternative arrangements will improve reported performance and may make funds of funds more attractive to a growing institutional clientele.

Suggested Citation

  • Stephen J. Brown & William N. Goetzmann & Bing Liang, 2005. "Fees On Fees In Funds Of Funds," World Scientific Book Chapters, in: H Gifford Fong (ed.), The World Of Hedge Funds Characteristics and Analysis, chapter 7, pages 141-160, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812569448_0007
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    References listed on IDEAS

    as
    1. Brown, Stephen J & Goetzmann, William N & Ibbotson, Roger G, 1999. "Offshore Hedge Funds: Survival and Performance, 1989-95," The Journal of Business, University of Chicago Press, vol. 72(1), pages 91-117, January.
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    More about this item

    Keywords

    Hedge Funds; Investment Analysis; Quantitative Analysis; Risk Analysis; Portfolio Analysis; Portfolio Returns; Risk of Hedge Funds;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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