Of course, some funds of hedge funds have done much better than the average.
But funds of hedge funds typically accept much smaller sums from qualifying investors.
According to Hedge Fund Research, a research company, the value of assets in funds of hedge funds doubled last year.
Today, some of the main culprits are structured notes, hedge funds (including hedge funds of funds and hedge funds of funds of funds) and variable annuity schemes.
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Most new investors start with funds of hedge funds: in exchange for an additional layer of fees, they delegate responsibility for due diligence and diversify their bets in an unfamiliar market.
Globally, a third of the pension funds surveyed (33%) invest in funds of hedge funds, and despite their apparent lack of satisfaction, 54% intend to increase their allocations to hedge funds within the next two years.
On the other hand, it is certain that pension consultant funds of funds of funds and funds of funds and hedge funds will all derive significantly greater compensation from pensions as a result of elaborate hedge fund schemes.
For example, according to a new global survey by Mercer Investment Consulting, less than a quarter (23%) of 180 pension funds surveyed that invest in funds of hedge funds are satisfied with their investment returns, while 28% are dissatisfied.
Papastavrou, who once worked for Bank of America and Deutsche Bank before founding Aris, broke ranks with his fellow managers of funds of hedge funds following the credit crisis and filed eight lawsuits against different hedge funds that refused to redeem his money.
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Now throw in something for the 2-and-20 crowd, namely private equity managers, venture capitalists, hedge fund operators and funds-of-hedge-funds operators.
However, in our experience many pensions are advised by their so-called independent consultants to invest a significant percentage of their assets, say 20%, in not just one but multiple hedge funds of funds, involving 50 to 150 underlying hedge fund managers.
Others either operate funds-of-hedge-funds (Goldman Sachs) or have set up separate hedge-fund arms (Gartmore and less successfully of late Bear Stearns).
As a result of our forensic investigations involving hundreds of hedge funds, funds of funds, and funds of funds of funds we have been asked to share our findings with certain key Washington figures.
The Fed's information-sharing agreement with the Securities and Exchange Commission is not enough, and Geithner did not believe direct regulation of hedge funds is practical, but tighter supervision of the amount of risk taken on by lending to hedge funds could help prevent excessive leverage.
Two years after the Madoff scandal, financial advisors and their clients find themselves at a crossroads with respect to hedge funds of funds, even as this industry continues to fight an uphill battle to regain investor trust.
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Redemption battles between hedge funds and their investors have been a common feature of the credit crisis as hedge funds blocked cash outflows in the name of preserving value of the underlying assets.
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Our conclusion is that the recommendations of these consultants to invest in hedge funds, funds of funds and funds of funds of funds result in a complete abandonment of generally accepted sound fiduciary standards applicable to pension portfolios.
Morgan Stanley, for instance, sponsors a fund of funds, Liquid Markets Fund I, that puts investors' money into an assortment of hedge funds that each impose one-way incentive fees (plus annual management fees).
My example also assumes an annual expense ratio of 0.65% for both the individual hedge funds and fund of funds.
Every conceivable conflict of interest scenario involving pension consultants is possible where hedge funds and funds of funds and funds of funds of funds schemes are involved.
Looking past the current public cynicism about the hedge fund of funds industry, it is incumbent on financial advisors and their clients to bear in mind that the need for non-correlating asset classes will never change, and hedge funds of funds still provide this effective source of diversification.
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They accelerated in the spring, when UBS shut down its Dillon Read hedge fund after losses in subprime bonds, and really hit a tone of urgency in June, when Bear Stearns, one of the biggest arrangers of mortgage bonds on Wall Street (and presumably, thus, an expert) was forced to shut down two of its hedge funds because of overwhelming redemptions and margin calls.
Certainly for funds-of-funds, which act as aggregators for hedge funds and which have been tainted by their role in the Madoff scandal.
In my view, the lack of hedge used by many hedge funds is the least of their problems.
Portfolio Reporting : Systematic reporting of portfolio data is set to begin for the majority of hedge funds at the end of the year via the Form PF (SEC) and the parallel Form CPO-PQR (CFTC).
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The Wall Street public pension trough feeding frenzy has, unbeknownst to taxpayers and government workers participating in these funds, cost the nation trillions and is only getting worse with the proliferation of hedge funds and private equity alternative investments.
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Certainly the mortgage hedge funds turned in far more spectacular returns than any of the huge macro hedge funds.
He says the relatively high costs of hedge funds versus mutual funds--hedge fund managers typically charge a 1% to 2% fee plus 20% or more of any profits for the fund each year--don't make them the best option for most individual investors.
The rocky track record of some iconic hedge funds has further troubled potential investors, says Daniel Jim of Tripod Management, which advises Hong Kong investors on hedge funds.
In our opinion, at most, only one fund of funds makes sense for pensions investing a limited portion of their assets in hedge funds.
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