[...]... Substrategies 81 84 HFRI Fund of Funds Conservative Index 84 HFRI Fund of Funds Strategic Index 85 HFRI Fund of Funds Diversified Index 85 HFRI Fund of Funds Market Defensive Index Fund of Funds Returns 1990–2002 86 87 Fund of Funds Returns 2000–2002 88 Fund of Funds Volatility 1990–2002 90 Fund of Funds Volatility 2000–2002 Fund of Funds Return Versus Volatility 1990–2002 Fund of Funds Risk-Adjusted Returns—The... In an attempt to create a useful resource for investors considering a fund of funds investment, I have organized the book into three parts Part 1 provides an overview of the fund of funds industry:  Fund of funds defined  Options for investing in hedge funds  Changes in the hedge fund industry  Hedge fund and fund of funds structures  The mechanics of fund of funds investing  The benefits and... today, and there are many more being developed As a group, they represent more than one-third of assets invested in hedge funds For most investors, the fund of funds provide an efficient and 3 4  Hedge Fund of Funds Investing Figure 1-1 Fund of Funds Structure Investor Investor Investor FOF Hedge Fund Hedge Fund Hedge Fund Hedge Fund Hedge Fund cost-effective way to invest It spares them the task of having... risks of fund of funds investing Part 2, which focuses on fund of funds performance, presents an analysis of fund of funds historical performance It also discusses performance expectations for adding funds of funds to a portfolio of traditional assets If investing in a fund of funds is determined to be the appropriate mode of accessing hedge fund returns, a plan is needed for sifting through the many... figu Fund of Funds in the Hedge Fund Industry  9 Outlined below are the seven most important factors contributing to the rapid growth in both the number of funds of funds and assets in funds of funds 1 Viability of hedge fund strategies/acceptance of hedge funds Attracted by the performance-based compensation (which averages about 1.5 percent of assets and 20 percent of profits annually), innovative and... blank PART 1 The Fund of Funds Industry This page intentionally left blank Fund of Funds in the Hedge Fund Industry Hedge Fund Investment Options Direct Investment Customized Portfolio Index Fund Fund of Funds Investment Growth of Funds of Funds Hedge Fund Industry Characteristics and Trends Hedge Fund Investment Structure Legal Structure Numbers of Investors and Minimum Investment Size Reporting and... of Funds Index MSCI Indices US$ World Index S&P 500 with Dividends Lehman Brothers Govt/Credit Bond Index THE FUND OF FUNDS ADVANTAGE An investor attempting to navigate in the field of hedge funds faces significant challenges: the large number of hedge funds, the diversity of strategies used, the range of financial instruments traded, and the various formats for investing in hedge funds The fund of funds. .. deliver the market return of the hedge fund industry or that of one of its underlying strategies Unlike a fund of funds, such an index is not actively managed but follows an allocation methodology designed to mimic the collective exposures of the greater hedge fund industry FUND OF FUNDS INVESTMENT The fourth approach is to invest in an existing fund of funds Funds of funds can provide an efficient solution... xv Part 1 THE FUND OF FUNDS INDUSTRY 1 Fund of Funds in the Hedge Fund Industry Hedge Fund Investment Options 3 4 Direct Investment 5 Customized Portfolio 5 Index Fund 6 Fund of Funds Investment 6 Growth of Funds of Funds Hedge Fund Industry Characteristics and Trends Hedge Fund Investment Structure 6 11 14 Legal Structure 16 Numbers of Investors and Minimum Investment Size 17 Reporting and Disclosure... fund of funds portfolio Many first-time hedge fund investors look to funds of funds not simply as an investment vehicle, but as a way of learning about hedge fund strategies and hedge fund managers along with how they should be selected for incorporation into multiple manager allocations Diversification For investors looking to make a representative investment in hedge funds, diversified funds of funds . OF FUNDS OF FUNDS 5 Performance of Funds of Funds 81 Fund of Funds Substrategies 84 HFRI Fund of Funds Conservative Index 84 HFRI Fund of Funds Strategic Index 85 HFRI Fund of Funds Diversified. 85 HFRI Fund of Funds Market Defensive Index 86 Fund of Funds Returns 1990–2002 87 Fund of Funds Returns 2000–2002 88 Fund of Funds Volatility 1990–2002 90 Fund of Funds Volatility 2000–2002 91 Fund. Screen to Create a Funds of Funds Short List 127 HFRI Fund of Funds Conservative Index 130 HFRI Fund of Funds Strategic Index 130 HFRI Fund of Funds Diversified Index 131 HFRI Fund of Funds Market