The Value of Funds of Hedge Funds: Evidence from Their Holdings

32 Pages Posted: 7 Dec 2012 Last revised: 13 Jul 2014

See all articles by Adam L. Aiken

Adam L. Aiken

Elon University

Christopher P. Clifford

University of Kentucky

Jesse A. Ellis

North Carolina State University

Date Written: July 7, 2014

Abstract

We examine the portfolio holdings of Funds of Hedge Funds (FoFs) to identify the channels through which FoFs add value for their clients. FoFs offer access to a diversified portfolio of funds that would be costly for constrained investors to manage on their own. Though we find only limited evidence that FoFs exhibit skill when selecting hedge funds, we find strong evidence that FoFs make skillful termination decisions. After FoFs divest from a hedge fund, those hedge funds subsequently underperform and fail more often. Our evidence indicates that FoFs learn and skillfully process information about their portfolio funds after they become investors, enabling them to forecast poor future performance. Our study suggests FoFs serve an important role as intermediaries in a market characterized by significant frictions and transactions costs.

Keywords: Hedge Funds, Funds of Funds, Portfolio Management

JEL Classification: G11, G23

Suggested Citation

Aiken, Adam L. and Clifford, Christopher P. and Ellis, Jesse A., The Value of Funds of Hedge Funds: Evidence from Their Holdings (July 7, 2014). Available at SSRN: https://ssrn.com/abstract=2181074 or http://dx.doi.org/10.2139/ssrn.2181074

Adam L. Aiken

Elon University ( email )

100 Campus Drive
Elon, NC 27244
United States

Christopher P. Clifford

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States
859-257-3850 (Phone)

Jesse A. Ellis (Contact Author)

North Carolina State University ( email )

Poole College of Management
Campus Box 7229
Raleigh, NC 27695
United States
919-515-9670 (Phone)

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