Hedge Fund of Funds Investing: An Investor's Guide

Introduction.

Part 1 The Fund of Funds Industry.
1 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 Disclosure.
Liquidity.
Lockup.
Summary.
  
2 Hedge Fund Investment Strategies.
Convertible Arbitrage.
Distressed Securities.
Emerging Markets.
Equity Hedge.
Equity Market Neutral.
Event Driven.
Fixed Income.
Macro.
Market Timing.
Merger Arbitrage.
Relative Value Arbitrage.
Sector Long/Short.
Short Selling/Short Bias.
Summary.

3 Fund of Funds Mechanics and the Two-Tiered Structure.
Structural Considerations.
Organization Structure.
Company Structure.
Domicile.
Subscriptions and Registration Exemptions.
Minimum Investment Size.
Fees.
Lockup, Redemption, and Liquidity.
The Fund of Funds Management Company.
Manager Due Diligence and Selection.
Risk Management.
Operations.
Performance and Exposure Reporting.
Summary.

4 Advantages and Disadvantages of Funds of Funds Advantages.
Diversification.
Due Diligence.
Risk Management.
Portfolio Management: Strategy Selection and Manager Selection.
Access to Funds/Capacity.
Consolidated Reporting.
Fees.
Performance.
Disadvantages.
Exposure to Other Investors’ Cash Flows.
Fees.
Lack of Control/Customization.
Decreased Transparency.
Summary.

Part 2 Historical Performance of Funds of Funds.
5 Performance of Funds of Funds Fund of Funds Substrategies.
HFRI Fund of Funds Conservative Index.
HFRI Fund of Funds Strategic Index.
HFRI Fund of Funds Diversified Index.
HFRI Fund of Funds Market Defensive Index.
Fund of Funds Returns 1990-2002.
Fund of Funds Returns 1990-2002.
Fund of Funds Volatility 1990-2002.
Fund of Funds Volatility 1990-2002.
Fund of Funds Return Versus Volatility 1990-2002.
Fund of Funds Risk-Adjusted Returns--The Sharpe Ratio.
Sharpe Ratio 1990-2002.
Sharpe Ratio 2000-2002.
Preservation of Capital 1990-2002.
Fund of Funds Performance Versus Equities.
Fund of Funds Performance During Bear and Bull Markets.
Average Performance During Negative Periods and Positive Periods 1990-2002.
Return Distribution 1990-2002.
Fund of Funds Performance During Periods of Market Stress.
Summary.

6 Fund of Funds in a Portfolio With Traditional Assets.
Linear Analysis of Returns.
Adding Funds of Funds to a Traditional Portfolio.
Achieving Superior Risk-Adjusted Returns.
Summary.

Part 3 A Commonsense Approach to Selecting Funds of Funds.
7 Defining Objectives and Identifying Candidates Step 1: Define Objectives and Parameters.
Objectives.
Parameters.
Strategy Restrictions.
Structural Requirements.
Fund of Funds Objectives and Parameters Worksheet.
Step 2: Screen to Create a Funds of Funds Short List.
HFRI Fund of Funds Conservative Index.
HFRI Fund of Funds Strategic Index.
HFRI Fund of Funds Diversified Index.
HFRI Fund of Funds Market Defensive Index.
Summary.

8 Issues in Due Diligence: The Fund of Funds Firm Background Information.
Staff Information.
Company Structure.
Asset Management Activities.
Product Information.
Performance.
Summary. 

9 Issues in Due Diligence: Portfolio Management Asset Allocation/Style Selection.
Due Diligence Criteria in Manager Selection.
Portfolio Construction.
Summary. 

10 Issues in Due Diligence: Risk Management Transparency and Separately Managed Accounts.
Transparency.
Managed Account Structures.
Pricing Risk Case Study: Lipper.
Style Drift Case Study: Integral.
Risk Management.
Compliance and Legal Issues.
Summary.

11 Fund of Funds Selection Case Study.
Scenario.
Step 1: Defining Investment Objectives and Parameters.
Step 2: Screening to Create the Funds of Funds Short Lis.t
Step 3: Conducting a Due Diligence Screen of the Funds of Funds Short List.
Step 4: Evaluating Finalists for Selection.
Final Selections.
Summary. 

Appendix A: AIMA Due Diligence Questionnaire. 
Appendix B: Excerpts from HFR Fund of Funds Industry Report.

Index.