Funds of Hedge Funds

Funds of hedge funds allocate capital to several hedge funds. Investors buying shares in a fund of funds are not investing in a specific hedge fund, but acquire a proportionate share of ownership in a collective portfolio. Although hedge funds may offer some specific benefits, it is quite difficult and time consuming for an investor to just go out and hire a single hedge fund manager on his own. Significant barriers, such as the complexity of the evaluation process and the experience that is necessary to perform effective on-going monitoring of the selected fund(s), will discourage most investors. Furthermore, given the high minimum investment requirements of individual hedge funds, direct investments have every chance of turning into concentrated portfolios, which are inherently poorly diversified and often highly illiquid. This explains why investors with time constraints, little experience or limited capital often prefer to gain access to alternative investments through funds of hedge funds to reach a proper diversification.