August 04, 2006
Fund of Hedge Funds! What Was That Again?
I recently wrote on how a fund of hedge funds was a good investment option. But I guess I haven’t explained a fund of hedge funds clearly enough so maybe we could have a tutorial on this aspect of hedge funds. So getting down to the definitions first, simply put, a fund of hedge funds is a diversified portfolio of hedge funds. These funds need not be correlated in any way.
The principle is similar to the ones used on the stock market. If you don’t think you can identify your stocks well enough, you tend to invest in a mutual fund that then invests in blue chip or whatever other types of stocks for you. While the returns are assured, they are not phenomenal. Now going one step further, a fund of hedge funds seeks to deliver consistent returns than even stock portfolios, mutual funds, unit trusts or individual hedge funds.
Since returns are assured, a fund of hedge funds is the preferred investment of choice for many pension funds, endowments, insurance companies, private banks and high-net-worth families and individuals. Yes, if you didn’t know, YOU too can invest in a fund of hedge funds. Only you have to be a high-net-worth individual or belong to such a family.
What are the benefits? Well, since you get access to a broad range of investment styles, strategies and hedge fund managers, your returns are more predictable than traditional investment funds. Another big time benefit is that it allows you access to a broader spectrum of leading hedge funds that may otherwise be unavailable due to high minimum investment requirements.
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