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

50 Pages Posted: 23 Mar 2005

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Matthew Rhodes-Kropf

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

Rui Zhao

BlackRock, Inc.

Multiple version iconThere are 3 versions of this paper

Date Written: November 20, 2005

Abstract

Since the after-fee returns in funds-of-funds are, on average, lower than hedge fund returns, it appears that funds-of-funds do not add value. However, we show that funds-of-funds should not be evaluated relative to hedge fund returns from reported databases. Instead, the correct fund-of-funds benchmark is the return an investor would achieve from direct hedge fund investments on her own without recourse to funds-of-funds. We use certainty equivalent concepts and revealed preference arguments to estimate attributes of the true, implied true fund-of-funds benchmark distribution. Since the benchmark characteristics seem reasonable, we conclude that, on average, funds-of-funds deserve their fees-on-fees.

Keywords: hedge fund, fund-of-funds, portfolio allocation, certainty equivalent

JEL Classification: G23, G11, G24

Suggested Citation

Ang, Andrew and Rhodes-Kropf, Matthew and Zhao, Rui, Do Funds-of-Funds Deserve Their Fees-on-Fees? (November 20, 2005). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=687274 or http://dx.doi.org/10.2139/ssrn.687274

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

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

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

Rui Zhao

BlackRock, Inc. ( email )

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

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