[...]... 75 Lack of Control/Customization 76 Decreased Transparency Summary 76 77 Part 2 HISTORICAL PERFORMANCE OF FUNDS OF FUNDS 5 Performance of Funds of Funds Fund of Funds Substrategies 81 84 HFRI Fund of Funds Conservative Index 84 HFRI Fund of Funds Strategic Index 85 HFRI Fund of Funds Diversified Index 85 HFRI Fund of Funds Market Defensive Index Fund of Funds Returns 1990–2002 86 87 Fund of Funds Returns... a fund of funds investment, I have organized the book into three parts Part 1 provides an overview of the fund of funds industry:  Fund of funds defined  Options for investing in hedge funds  Changes in the hedge fund industry  Hedge fund and fund of funds structures  The mechanics of fund of funds investing  The benefits and risks of fund of funds investing Part 2, which focuses on fund of funds. .. more than one-third of assets invested in hedge funds For most investors, the fund of funds provide an efficient and 3 4  Hedge Fund of Funds Investing Figure 1-1 Fund of Funds Structure Investor Investor Investor FOF Hedge Fund Hedge Fund Hedge Fund Hedge Fund Hedge Fund cost-effective way to invest It spares them the task of having to select and gain access to suitable hedge fund managers from the... Restrictions 126 Structural Requirements 126 Fund of Funds Objectives and Parameters Worksheet 128 Step 2: Screen to Create a Funds of Funds Short List 127 HFRI Fund of Funds Conservative Index 130 HFRI Fund of Funds Strategic Index 130 HFRI Fund of Funds Diversified Index 131 HFRI Fund of Funds Market Defensive Index 131 Summary 8 Issues in Due Diligence: The Fund of Funds Firm 136 137 Background Information... field of hedge funds faces significant challenges: the large number of hedge funds, the diversity of strategies used, the range of financial instruments traded, and the various formats for investing in hedge funds The fund of funds provides a ready solution to many of the complexities of investing in the unique set of investment strategies that collectively are referred to as hedge funds The fund of funds. .. intentionally left blank PART 1 The Fund of Funds Industry This page intentionally left blank Fund of Funds in the Hedge Fund Industry Hedge Fund Investment Options Direct Investment Customized Portfolio Index Fund Fund of Funds Investment Growth of Funds of Funds Hedge Fund Industry Characteristics and Trends Hedge Fund Investment Structure Legal Structure Numbers of Investors and Minimum Investment... Acknowledgments Introduction xiii xv Part 1 THE FUND OF FUNDS INDUSTRY 1 Fund of Funds in the Hedge Fund Industry Hedge Fund Investment Options 3 4 Direct Investment 5 Customized Portfolio 5 Index Fund 6 Fund of Funds Investment 6 Growth of Funds of Funds Hedge Fund Industry Characteristics and Trends Hedge Fund Investment Structure 6 11 14 Legal Structure 16 Numbers of Investors and Minimum Investment Size... returns above that of the hedge fund industry HEDGE FUND INDUSTRY CHARACTERISTICS AND TRENDS Before examining the fund of funds approach to investing in hedge funds, it is essential to first understand the hedge fund industry and the fund of funds place in that industry There are two key aspects of the hedge fund industry to observe: 1 The hedge fund industry consists of a number of different investment... 87 Fund of Funds Returns 2000–2002 88 Fund of Funds Volatility 1990–2002 90 Fund of Funds Volatility 2000–2002 Fund of Funds Return Versus Volatility 1990–2002 Fund of Funds Risk-Adjusted Returns—The Sharpe Ratio Sharpe Ratio 1990–2002 Sharpe Ratio 2000–2002 Preservation of Capital 1990–2002 91 93 96 97 99 100 Fund of Funds Performance Versus Equities 100 Fund of Funds Performance During Bear and Bull... analysis of fund of funds historical performance It also discusses performance expectations for adding funds of funds to a portfolio of traditional assets If investing in a fund of funds is determined to be the appropriate mode of accessing hedge fund returns, a plan is needed for sifting through the many available choices Part 3 of this book lays out a framework for evaluating and selecting a fund of funds . 1990–2002 87 Fund of Funds Returns 2000–2002 88 Fund of Funds Volatility 1990–2002 90 Fund of Funds Volatility 2000–2002 91 Fund of Funds Return Versus Volatility 1990–2002 93 Fund of Funds Risk-Adjusted. Substrategies 84 HFRI Fund of Funds Conservative Index 84 HFRI Fund of Funds Strategic Index 85 HFRI Fund of Funds Diversified Index 85 HFRI Fund of Funds Market Defensive Index 86 Fund of Funds Returns. of Control/Customization 76 Decreased Transparency 76 Summary 77 Part 2 HISTORICAL PERFORMANCE OF FUNDS OF FUNDS 5 Performance of Funds of Funds 81 Fund of Funds Substrategies 84 HFRI Fund