hedge fund-fund of funds

CFA Level I
#1

higher managment fees but what about expected return?

#2

lower

#3

this one confused me… hedge funds have higher fees but fof also pay double fees even if indirect… which of these two have higher fees?

#4

Amit, you have already answered your question. It¡¦s like compounding interest :slight_smile: fee on a fee is higher than just a fee. So higher fee will result in lower returns. ƒº Milos

#5

It is lower returns because through a fund of funds you are more diversified vs. just being in one fund, hence lowering your risk and return.

#6

So TheChad you want to say that diversification lowers return? There goes Markowitz theory down the drain… Milos

#7

Agree with Chad

#8

Yeah, lower returns is my choice. FOFs (investment mgmt firms) always give you a lower return because they are less risky (more stable).

#9

Markowitz theory doesnt targets magnitude of returns, it targets variability of returns or simply put the risk. Diversification helps to moderate the risk at the cost of returns.

#10

Diversification reduces unsystematic risk which reduces the risk premium required to invest in an asset or portfolio of assets.

#11

Oh, my bad. If you think of additional costs associated with diversification then yes, return will be lower when you diversify… But still, higher fee means lower return for investors. Milos

#12

TheChad Wrote: ------------------------------------------------------- > It is lower returns because through a fund of > funds you are more diversified vs. just being in > one fund, hence lowering your risk and return. That’s questionable. Leverage can increase risk and return to the desired levels.

#13

I put lower: 1) More fees = less retrun 2) Less risk = assumes lower retrun Not sure if this is correct but that was my reasoning.

#14

maratikus Wrote: ------------------------------------------------------- > TheChad Wrote: > -------------------------------------------------- > ----- > > It is lower returns because through a fund of > > funds you are more diversified vs. just being > in > > one fund, hence lowering your risk and return. > > That’s questionable. Leverage can increase risk > and return to the desired levels. I think we are saying the same thing. With increased leverage, you increase risk as well as your potential returns. At its most basic level, the higher the risk, the higher the required rate of return.

#15

Well compared to what is the question…more fees don’t mean less return…compared to a worse performing fund. Renaissance Technologies charges a 5/40 fee (v. a standard 2/20) but returns about 36% a year.

#16

higher risk does not mean lower “expected return”. if funds have low correlation, fof can increase return and lower risk. so if you kept risk level same, you increase returns

#17

e.g. hedge fund 1 - expected return 20%, expected sd - 30% hedge fund 2 - expected return 20% - expected sd - 30% correlation = -1 fof - (50% hf1, 50% hf2) expected return 20%, expected sd (risk) = 0

#18

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#19

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#20

i meant “lower risk” doesn’t mean “lower expected return”