Originally published at: https://blog.12min.com/hedge-fund-of-funds-investing-summary/
An Investor’s Guide
As its subtitle states, “Hedge Fund of Fund Investing” is a guidebook for investors interested in this fairly new type of investing. And it does a pretty good job both as an introduction and as a manual for specialists even ten years after its publication.
Illustrated with neat graphs and charts, “Hedge Fund of Fund Investing” explains what FOFs are, what are the risks and benefits of using them, and how you can use them to get richer – particularly if you are already rich!
About Joseph G. NicholasJoseph G. Nicholas is both the founder and the chairman of HFR Group, LLC. The conglomerate encompasses Hedge Fund Research, one of the world’s leading providers of hedge fund data, HFR Europe, an advisory service, and HFR Asset Management, a FOF management company. Nicholas has authored two other books, “Investing in Hedge Funds” and “Market-Neutral Investing.”
"Hedge Fund of Funds Investing Summary"If you are interested in investing – or merely want an alternative pension plan – you’re probably already aware of what a hedge fund is. However, there’s a big chance that you know a little – or nothing at all – about hedge fund of funds.
And that’s where Joseph G. Nicholas’ “Hedge Fund of Funds Investing” comes in handy. When it was published in 2004, it was the first of its kind. And, a decade later, it’s still one of the best.
But, to pick up where we left off.
In a way, a hedge fund of fund (FOF) is to a hedge fund the same a hedge fund is to a regular investment fund. It is an investment strategy which attempts to circumvent the obstacles an investor may face while trying to find the best hedge fund. (After all, there are way too many now, aren’t they?)
By simply pooling multiple hedge funds under the same hat. So, double the investments, double the risks, double the adventure. And, of course – double the possible returns.
But, also – let’s not forget – double the necessary expertise!
So, what do you need to start right away?
Well, you need to have some money. In fact, a lot of it! You see, FOF investments can easily reach as high as $10 million per investor! So, basically, “Hedge Fund of Funds Investing” is only for a selected amount of people.
Well, as usual, they won’t. The key to a working FOF is finding a good FOF manager. Because that’s the only way, you can be sure that it won’t be another money-down-the-drain story!
And good FOF manager constantly analyzes the downsides and the upsides of the all of the hedge funds available before combining the right ones. It seems that they are doing quite a good job because so far, hedge FOFs have shown a great success.
And, yes, that means returns even in a state of crisis!
There’s a caveat though. FOFs are a lot less transparent than hedge funds. In other words, once you give your money to the FOF manager, you don’t know where he or she will invest it.
That may be a bit scary, but – hey, let’s face it: you don’t win big without taking a risk or two.
Or ten million, for that matter.
Key Lessons from “Hedge Fund of Funds Investing”1. What Is Hedge Fund of Funds Investing… in Few Words 2. Hedge Fund of Funds Are Less Transparent – But More Successful 3. You Have to Have Money – to Make More Money
What Is Hedge Fund of Funds Investing… in Few WordsTo quote Joseph G. Nicholas a “fund of funds is a pooled vehicle for investing in multiple hedge funds.” So, it’s a multi-manager investment strategy, aiming to provide investors with a ready solution to all their hedge fund headaches. To put it in even plainer words – if you’re having a hard time choosing the right hedge fund, combine them! And that what hedge FOF is!
Hedge Fund of Funds Are Less Transparent – But More SuccessfulNow, it it’s pretty difficult to navigate through the sea of hedge funds, why should it be any easier to combine them?
Well, it’s not!
That’s why you’ll need a good FOF manager. But, you’ll also need to trust him, because, once you’ll give him your money, you won’t have a direct relationship with the hedge funds they’re invested in. However, don’t worry: it seems that, with the right manager, hedge FOFs are not a risky investment!
You Have to Have Money – to Make More MoneyOf course, the prerequisite is money. And, as we said above, a lot of money. Because, the minimum investment is, say, about $100,000 – but it can go up to $10 million! You don’t need an average with such high amounts, but Nicholas gives you one: about $1 million. We guess the lesson is: if you have that much, you’ll be able to make a lot more with a hedge FOF.
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Quotes[bctt tweet="The goal of this book is to provide investors who are new to the hedge fund industry with a practical guide to understanding and evaluating funds of funds." username="get12min"]
[bctt tweet=“The fund of funds is a pooled vehicle for investing in multiple hedge funds.” username=“get12min”]
[bctt tweet=“The minimum investment restrictions mean that building a diversified portfolio of hedge fund investments requires considerable capital.” username=“get12min”]
[bctt tweet=“Hedge funds differ from traditional mutual funds in the range of allowable investment approaches, and the goals of the strategies they use.” username=“get12min”]
[bctt tweet=“Hedge funds and funds of funds have very similar investment structures.” username=“get12min”]