CFA Level 1 - Alternative Investments
Fund of funds are not without disadvantages, however, and we would be remiss not to discuss them.
- Fee - An investor in a fund of funds is required to pay an additional layer of fees. Usually, these fees range from 1-2% of assets, but some fund of funds charge a performance fee, too. However, the SEC limits the number of fees an investor can pay.
- Performance - The hedge funds in the fund of funds are usually chosen by their past performance, which tends to give little indication of future performance. It is wise to remember that a fund of funds is only as good as its manager and the underlying funds it invests in.
- Diversification is a two-edged sword - Blending various types of hedge funds may reduce your exposure; however, you'll be subject to higher fees and disparate returns.