A fund of hedge funds (FoHF) is an investment vehicle that invests in a diversified portfolio of hedge funds rather than directly in individual securities. This structure allows investors to access a range of hedge fund strategies and managers through a single investment. FoHFs aim to provide broader diversification, risk management and potentially lower investment minimums compared to investing directly in individual hedge funds.
The primary advantage of a FoHF is diversification across different hedge fund strategies, such as long/short equity, global macro or arbitrage. This diversification can help mitigate risk and smooth out investment returns. FoHFs also offer investors the expertise of professional fund managers who select and monitor the underlying hedge funds, potentially leading to better risk-adjusted returns.
While FoHFs offer diversification and professional management, they also come with certain drawbacks. These include higher fees (as there are multiple layers of fees from both the FoHF and the underlying hedge funds), limited liquidity and potential for lower returns due to fee structures. Investors should also be aware of the specific risks associated with hedge fund strategies, such as leverage and derivative usage.
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