August 16, 2006
Dip, Dip Fund of Funds
I know I’ve been going on and on about fund of funds and about how they are good and a safer investment. But now as I research more about fund of funds, I find that I may have been misguided by the sheen. I mean it may not be as good as it sounds. As the cliché goes, I probably made the mistake of judging the book by its cover. And well there are quite a few out there who probably make the same mistake. When you invest in a fund of funds, you probably believe that your fund of funds manager is doing the best he or she can for your investment. You better think again! At the end of the day, the hedge fund market also plays the fee game. Everybody is in it for the money and the investor is the golden honey pot. Yes, this may sound ridiculous, but look at it this way – hedge fund managers are human too and greed is a typically human trait, isn’t it? Well, I digress again.
It seems the hedge fund community engages in a practice called ‘double dipping’. This means, they may not always be seeking the best manager for their multi-strategy funds. They may be seeking the best marketing deals in each strategy they can get within each strategy. Sounds confusing? Let me explain. These managers glib talk you, the investor, into investing in their fund of fund vehicles. And on the hedge fund side, they offer contract marketing agreements. So, they essentially make money from both ends – the investors and a marketing fee for putting their fund of funds investment with a manager in any given particular strategy.
The problem with this strategy is that while the fund of funds manager makes his/her money, you may be getting a raw deal. I mean this fund of fund manager is probably passing up a good manager in a given strategy to get a better deal with a lesser quality manager. Are you game for such a risk?
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