High fees turn investors off fund of hedge funds

By Darin Tyson-Chan

HIGH fees remain the primary reason why investors are excluding fund of hedge fund products from their portfolios as an alternative income stream, according to research conducted by van Eyk.

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

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

“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,” Lander added.

However, the report indicates that if investors can manage the high fees associated with these products, fund of hedge funds can serve to minimise capital loss and volatility in a portfolio.

These offerings have the ability to achieve such results because they possess a low correlation with traditional asset classes, can provide alternative sources of alpha and beta, and have an attractive risk/return profile.

“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 explained.

Fund of hedge fund strategies can also eliminate the dangers of manager risk connected to single manager hedge funds, according to the report, as they combine a variety of investment techniques employed by a range of fund managers.

The study by van Eyk is the first to be released under the new rating definitions the research house announced recently. It was compiled after van Eyk’s analysts in both Europe and North America conducted on-site interviews.