Analyzing the Fee Structure of Hedge Funds That Invest in Other Funds.

Funds of hedge funds invest solely in other hedge funds. The hedge fund manager selects funds based on a specific investment strategy or a combination of different investment strategies to achieve a better return. The benefit of combining different investment strategies is to achieve diversification and skilful management to reduce market risk. The disadvantages are the fees of asset management and the incentive fees that are charged to manage these funds. They charge a 2% management fee and an incentive fee of 15% to 25 % from the profit that is generated. The double fee structure is a disadvantage of investing in funds of funds. The diversification is achieved by the multiplication of fees paid by the investor. The risk is that you could loose from your initial capital due to low return and high transaction fees. Fund of funds cannot as easily be liquidated. They have a withdrawal period of either monthly or quarterly. As an example, we can mention large cap equity stocks that are traded in the S&P500 index in the USA and government bonds. The sample is provided from Data Feeder dataset. It is very comprehensive and includes funds of funds hedge funds for the period 1998 to 2003.