Hi, I am confused with the fee structure of Fund of Funds. Many FoF charges a 2/20 or 1/10 but does it charge the fee AFTER the cut of the underlying funds or BEFORE? If it charges their fee after the cut of underlying funds then the real fee compared to the money made by trading would be very high (double of a typical hedge fund) because the underlying funds would charge a 2/20 of their own. On the other hand if the 2/20 charged by the fund of funds already includes the underlying cuts, where would be the profit come from for the FoF? Thanks so much in advanced.
FOHF have always a double layer of fees. The FOHF fee is exclusive the fee of the underlying funds. Most FOHF unfortunately underperform the HF indices. But there are not much alternative for investing in HF because most HF require high minimum investments.
FOF charge fees in addition to what the underlying funds charge. Therefore, you want to make sure that the FOF manager adds value through their due diligence process, by monitoring the underlying funds and by allocating strategically (taking into account strategy outlook, market conditions and manager performance). Additionally, some FOF are able to access best of breed managers that are "closed to new investments". The bottom line is, FOF are a vehicle for investors who would like to outsource the due diligence and monitoring process, who don't want to invest the minimum in one fund (many cases $1M) and who would like diversification within the asset class of hedge funds. If you have the time and sophistication to engineer and monitor your own porfolio independently, it negates the need to hire a FOF manager and pay the extra fees....at the end of the day though, you have to look at the risk/ reward proposition and the net of fees return to you as a LP in a FOF. This begs the question- can I do better on my own or do I want to trust someone who has been involved in manager selection for many years? Also, many investors are able to structure products (i.e. principal protection and leverage) around LP interests in a FOF. It is easier (i.e. cheaper) to structure a product around a FOF investment vs. a more esoteric, illiquid strategy (such as credit, distressed, etc)
get you access to what? closed managers? you'd be surprised how many "closed" managers will suddenly "re-open" if the situation is right....
Not all "fund of hedge funds" charge a 2/20. More typical is a 1/10. There are hundreds of fund of funds with a management fee alone, these tend to be in the 9 digit range. A large percentage operate with a "hurdle rate", based on an index (SP500) or money rate (Tbill). The incentive fee begins once the return clears the hurdle. Once the hurdle is cleared a fund might be able to collect a fee from first dollars or more commonly, limit to the amount over the hurdle. Many fohf negotiate 'most favored nation' status with underlying managers, generally the drill if the comprise the first 'real' institutional money the underlying manager has accepted. Of course if the manager has white hot performance and many suitors MFN status can be denied.