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
Date Written: November 25, 2008
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: Suggested Citation