Funds Of Hedge Funds Turn In Creditable Performance In 2005

by Carla Johnson, Investors Offshore.com

06 February 2006

Defying the negative press surrounding the performance of the hedge fund sector during 2005, one hedge fund performance benchmark has shown that funds of hedge funds produced "respectable" cumulative returns for 2005, turning in the sector’s second-highest annual performance return since 2000.

According to the Alternative Asset Center Fund of Hedge Funds Benchmark, an equally-weighted average of 2,708 funds of hedge funds produced returns of 7.53% in 2005, outperforming the S&P 500 Index by 2.61% and more than tripling the Lehman Bond Return of 2.43%.

The AAC Benchmark shows that fund of hedge fund returns have been growing steadily over the past five years. In 2001, the index returned just 1.89%; returns then grew to 5.25% in 2002 and 6.43% in 2004.

AAC noted that the index performed particularly well in the latter half of 2005, a development that it says augurs well for FoHF returns in 2006.

Funds of hedge funds, or multi manager funds, have become increasingly popular in recent years as both individual and institutional investors seek to diversify assets and spread risk. They are also being made increasingly available to retail investors.

Fund of funds managers typically invest across a range of hand-picked single manager hedge funds, although the disadvantage is that they attract two layers of fees; one from the fund of fund manager, and one from the underlying hedge funds.

Founded in July 1999 as a research company, AAC published its first three directories in 2001 and now maintains data on over 9,000 hedge and alternative investment funds.

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