Do Funds-of-Funds Deserve Their Fees-on-Fees?
Coauthor(s): Matthew Rhodes-Kropf, Rui Zhao.
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.
Source: Journal of Investment Management
Rhodes-Kropf, Matthew, Andrew Ang, and Rui Zhao. "Do Funds-of-Funds Deserve Their Fees-on-Fees?" Journal of Investment Management 6, no. 4 (2008): 34-58.