fund of funds typically have lower more stable returns
this one was clear to me. lower returns and higher fees.
topher Wrote: ------------------------------------------------------- > this one was clear to me. > lower returns and higher fees. please describe how return is lower if individual funds are not correlated? you can in fact, increase returns.
ryanwtyler Wrote: ------------------------------------------------------- > topher Wrote: > -------------------------------------------------- > ----- > > this one was clear to me. > > lower returns and higher fees. > > > please describe how return is lower if individual > funds are not correlated? you can in fact, > increase returns. you’re right. i just looked it up in schweser. it must be the extra fees, otherwise it makes absolutely no sense
ryanwtyler Wrote: ------------------------------------------------------- > ryanwtyler Wrote: > -------------------------------------------------- > ----- > > topher Wrote: > > > -------------------------------------------------- > > > ----- > > > this one was clear to me. > > > lower returns and higher fees. > > > > > > please describe how return is lower if > individual > > funds are not correlated? you can in fact, > > increase returns. > > > you’re right. i just looked it up in schweser. it > must be the extra fees, otherwise it makes > absolutely no sense I don’t have my books with me, but I believe it is pretty clear in the CFAI texts.
fund of funds should have lower expected returns?
not in reality. but for the test i suppose
This question pissed me off the most in the AM session. I know what FoFs are but the question was just hard to answer
weird i don’t know about this… I need to go and clarify this concept with the books.
the reason for lower return is because everyone is forgetting the benefits of FoF, which is also, lower volatility (measured by either standard deviation or tracking error).
lower volatility doesnt mean lower expected return. See above post
fof investors are basically outsourcing manager selection and portfolio management. fofs typically have better access to and understanding of hf investments. and this is the justificaiton for their fee. I can tell you that there are a lot of different examples that you can think of that will give you different answers, like being in a bad fof vs. being in renaisance. or being in a great fof vs. being in amaranth In reality though, the typical fof investor does realize lower returns than a direct hf investor. This isn’t caused by lower volatility perse, but these returns are gladly given up in order to reduce volatility. This has a lot to do with the source of funds flowing into fofs, mostly liability driven investors seeking hedge fund exposure that is uncorrelated to the balance of their portfolio. This is also why many of the large funds have been lifting out smaller teams in hopes of developing in hosue multi strat funds that work effectively like a fof, but without the extra 1/10 in fees. Also, you will see increasingly more structured products driven off of hedge fund indices. Both of these developments serve to surf the same wave as the fofs, delivering safer lower returns than some unsophisticated selection process at a pension meeting somewhere
that was not meant to imply pension investors are not smart or talented investors, they simply may not yet have the in house talent for hf investment selection
Fund of funds have dramatically lower management fees than hedge funds. Yes you indirectly pay a higher fee because after they pay the higher management fees of the hedgefunds they then in addition take their lower management fee. hedgefunds management fee is generally 2 and 20 fund of funds is usually 1 and 10 “total” fee is higher, but the management fee is lower