Question

1. What is Fund of Funds in the hedge fund industry? What service is the fund of finds providing, or another way to look at it as ‘why is a fund of funds needed’?

Answer 1

A funds of funds as the name suggests is an investment strategy in which a fund manager holds multilple type of different hedge funds in his portfolio of investments.

A fof is needed because of the following benefits :-

1) Improvement in diversification - a fund of fund provides the fund manager an opportunity to invest in a number of different asset classes with small investment leading to lower correlation and higher expected return per unit of risk.

2.) Lower cost - generally minimum ticket size to invest in a hedge fund is extremely high but with fof structure this cost is also discounted

3) improvement in management - with fof structure the hedge fund manager can Select multiple best fund with best management and can lead to efficiency

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