High Fees Deter Fund Of Hedge Funds Investors

by Carla Johnson, Investors Offshore.com

17 November 2005

Investors are being deterred from putting money into funds of hedge funds because returns are often greatly diminished by high fee levels, according to research by the Australian managed funds research firm van Eyk.

The study found that fees charged by fund of hedge fund offerings can be in excess of 4 per cent of the product's assets per annum.

“This is a significant percentage of the investor’s likely returns, and the alpha provided by these funds,” said van Eyk senior research analyst Dr Jerome Lander.

“Consequently, investors need to believe that their chosen fund of fund can more than offset its extra layer of fees by superior manager and strategy selection,” he added.

However, the report went on to point out that while fund of hedge fund investors may lose out in terms of having to pay higher fees, this is balanced out by the reduced risk and lower levels of volatility that are gained from investing across a basket of non-correlated hedge funds.

"The more bearish an investor is about returns from traditional asset classes, the more sense it makes to include exposure to fund of hedge funds manager in a portfolio. This is because the risk/return trade-off becomes more favourable,” Lander observed.

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