Types of Alternative Investments

Fund of Hedge Funds

A fund of hedge funds is an investment vehicle that pools investor assets together and invests across multiple hedge funds. For more information on what hedge funds are, please read our educational guide: Hedge Funds: An Introduction.

A fund of hedge funds can offer investors a potentially lower minimum investment to access a professionally selected and managed portfolio of hedge funds. The sponsor of the fund of hedge funds is responsible for the management of the fund, including the due diligence, manager selection, portfolio allocation, risk management, ongoing monitoring and rebalancing.

A fund of hedge funds will generally seek to deliver absolute returns with a goal of diversification from stocks and bonds and reduced portfolio volatility. In some cases, the pooling of investor money together may allow a fund of hedge funds to access managers unavailable to most individual investors due to high investment minimums.

Fund of Hedge Funds | Benefits and Challenges

  Benefit Challenge
Possibility of Generating Absolute Returns Checkmark Icon  
Potential for Lower Volatility Checkmark Icon
 
Potential for Diversification Checkmark Icon  
Accessibility Checkmark Icon  
Minimum Investment Requirement Checkmark Icon  
Required Holding Periods (Lockups) Checkmark Icon  
Transparency   Checkmark Icon
Fee Structure   Checkmark Icon
Manager Due Diligence Checkmark Icon  
Tax Reporting Checkmark Icon  
Regulatory Oversight   Checkmark Icon

 

Funds of hedge funds may offer quarterly liquidity, but can also be subject to the minimum initial holding periods of underlying hedge funds. In addition, most funds of hedge funds are still subject to the complex fee structure and lack of transparency of the underlying hedge fund managers in which they are invested. 

The fund of hedge funds may or may not be registered with a regulatory agency and can provide either 1099 or K-1 tax reporting. Investors should check with their product provider prior to investing.

 

See Glossary of Terms for definitions

Tutorials

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