Do Funds-of-Funds Deserve Their Fees-on-Fees?

Journal of Investment Management, Fourth Quarter 2008

Posted: 26 Nov 2008 Last revised: 15 Jun 2011

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Rui Zhao

BlackRock, Inc.

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: November 25, 2008

Abstract

Since the after-fee returns of funds-of-funds are, on average, lower than hedge fund returns, it is easy to conclude that funds-of-funds do not add value compared to hedge funds. However, funds-of-funds should not be evaluated relative to hedge fund returns in publicly reported databases. Instead, the correct fund-of-funds benchmark is the set of direct hedge fund investments an investor could achieve on her own without recourse to funds-of-funds. We use asset allocation concepts to estimate characteristics of the fund-of-funds benchmark distribution. Since the benchmark characteristics are reasonable, we conclude that funds-of-funds, on average, deserve their fees-on-fees.

Keywords: Hedge funds, survivorship bias, performance evaluation, benchmarking, asset allocation

JEL Classification: G00

Suggested Citation

Ang, Andrew and Zhao, Rui and Rhodes-Kropf, Matthew, Do Funds-of-Funds Deserve Their Fees-on-Fees? (November 25, 2008). Journal of Investment Management, Fourth Quarter 2008. Available at SSRN: https://ssrn.com/abstract=1307121

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Rui Zhao

BlackRock, Inc. ( email )

55 East 52nd Street
New York City, NY 10055
United States
2128105015 (Phone)
2128108764 (Fax)

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit ( email )

Soldiers Field Road
Rock Center 312
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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