Hedge fund fund of funds?
A fund of hedge funds is a fund of funds that invests in a portfolio of different hedge funds to provide broad exposure to the hedge fund industry and to diversify the risks associated with a single investment fund. Funds of hedge funds select hedge fund managers and construct portfolios based upon those selections.
An FOF spreads out risk. Whereas owning one mutual fund reduces risk by owning several stocks, an FOF spreads risk among hundreds or even thousands of stocks contained in the mutual funds it invests in. FOFs also provide the opportunity to reduce the risk of investing with a single fund manager.
A fund of funds (FOF)—also known as a multi-manager investment—is a pooled investment fund that invests in other types of funds. In other words, its portfolio contains different underlying portfolios of other funds. These holdings replace any investing directly in bonds, stocks, and other types of securities.
Tip. A fund of hedge funds is an investment company that invests in hedge funds—rather than investing in individual securities. Funds of hedge funds typically charge a fee for managing your assets, and some may also include a performance fee based on profits.
A feeder fund is a type of investment fund that does the majority of its investments through a master fund, using a master feeder relationship. It is similar to a strategy called fund of funds, but the main difference is that the master fund does all the investing.
Types of Fund Of Funds (FOFs)
For example, FoFs could invest in one mutual fund scheme that invests in stocks, one debt fund scheme that invests in bonds, and one gold fund scheme. It helps you to diversify your investments across different asset classes to earn better returns by minimizing the portfolio risk..
Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target date funds. Each type has different features, risks, and rewards. Money market funds have relatively low risks.
Limitations of Fund of Funds
Expense ratios to manage a fund of funds Mutual Funds are higher than standard Mutual Funds, as it has a higher managing expense. Added expenses include primarily choosing the right asset to invest in, which keeps on fluctuating periodically.
The structure of a fund of funds is a limited partnership, similar to that of an individual private equity fund. There is a general partner that operates the FoF and manages the investments, while the limited partners provide the investment capital.
The Generally Accepted Accounting Principles (GAAP) basis classification divides funds into three fund categories: governmental, proprietary, and fiduciary.
What is the difference between a hedge fund and a fund?
Hedge funds aim to deliver absolute returns to their clients, meaning they seek to generate positive returns regardless of what the market conditions may be. This is different from mutual funds, which generally aim to outperform a benchmark or market index.
While mutual funds are available to a wide range of investors, including normal investors, hedge funds are exclusive and often only open to high-net-worth investors. Mutual funds are made to provide diversity within the asset class or investment strategy of their choice.
BlackRock manages US$38bn across a broad range of hedge fund strategies. With over 20 years of proven experience, the depth and breadth of our platform has evolved into a comprehensive toolkit of 30+ strategies.
Examples include mutual funds, which gather money from numerous investors and invest it in a diversified portfolio of assets, and hedge funds, which invest the assets of high-net-worth individuals (HNWI) and institutions in a way that is designed to earn above-market returns.
An umbrella fund allows a fund to create compartments such that each sub-fund can provide different investment strategies or rights to investors. A master-feeder structure allows multiple funds using the same investment strategy to pool their capital and be managed as part of a bigger investment pool.
What Is a Mirror Fund? An insurance provider will create a mirror fund to replicate the performance of a high-quality mutual fund. These mirror funds come as the investment options for a variable life insurance policy.
A Fund of Fund or FoF invests in other mutual fund schemes. A regular mutual fund scheme or fund collects money from investors and invests the money in stocks or debt based on its mandate. An FoF, on the other, collects money from investors and invests it in one or many mutual fund schemes.
Modern hedge fund history began with Alfred Winslow Jones, a sociologist and journalist who wrote about market behavior in the 1930s and 1940s and founded one of the first hedge funds in 1949. Jones's fund used leverage and short selling to "hedge" its stock portfolio against drops in stock prices.
Index funds are popular with investors because they promise ownership of a wide variety of stocks, greater diversification and lower risk – usually all at a low cost. That's why many investors, especially beginners, find index funds to be superior investments to individual stocks.
The key difference between the two is that hedge funds chase the big fish – investments that are high risk, high reward. Mutual funds, on the other hand, stick to the shallows where they can catch smaller but more reliable returns.
What is the safest mutual fund?
Money market mutual funds = lowest returns, lowest risk
They are considered one of the safest investments you can make. Money market funds are used by investors who want to protect their retirement savings but still earn some interest — often between 1% and 3% a year. (Learn more about money market funds.)
Index investing pioneer Vanguard's S&P 500 Index Fund was the first index mutual fund for individual investors.
The Bottom Line. Equities and real estate generally subject investors to more risks than do bonds and money markets. They also provide the chance for better returns, requiring investors to perform a cost-benefit analysis to determine where their money is best held.
However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.
Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
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