Via investments in listed indexes it is possible to provide investors with greater liquidity & transparency but with lower costs than comparable fund of funds while delivering returns at least equal to fund of funds.
Funds of funds are beset with a number of disadvantages
Results – research show most deliver ‘beta’ or average returns at best
Liquidity – underlying holdings are highly illiquid assets with lock ups
Transparency – investors have no knowledge of actual underlying investments (i.e subprime)
Risk – specific risk associated with individual managers
Costs – multi tiered 2&20 fee structure
Availability – the top hedge funds are closed to new investors
By comparison funds that invest in listed indexes or benchmarks provide:
Results – comparable risk-adjusted returns to fund of funds
Liquidity – underlying holdings are highly liquid assets, daily traded avoiding long ‘lock up’ periods
Transparency – full ‘look through’ to underlying assets allows investors to know what they are buying
Risk Management – no manager specific risk associated with individual hedge funds
Cost – use of index products & ETF’s reduce costs to investors compared to the 2-3 layer 2/20 multi manager fund of fund products
