Working Paper: NBER ID: w13944
Authors: Andrew Ang; Matthew Rhodes-Kropf; Rui Zhao
Abstract: Since the after-fee returns of funds-of-funds are, on average, lower than hedge fund returns, it is easy to conclude that funds-of-funds do not add value compared to hedge funds. However, funds-of-funds should not be evaluated relative to hedge fund returns in publicly reported databases. Instead, the correct fund-of-funds benchmark is the set of direct hedge fund investments an investor could achieve on her own without recourse to funds-of-funds. We use asset allocation concepts to estimate characteristics of the fund-of-funds benchmark distribution. Since the benchmark characteristics are reasonable, we conclude that funds-of-funds, on average, deserve their fees-on-fees.
Keywords: No keywords provided
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| existence of funds of funds (G23) | better risk-adjusted returns (G11) |
| unskilled investors (G11) | avoid the worst-performing hedge funds (G23) |
| funds of funds (G23) | enhance overall expected utility (D81) |
| average hedge fund performance (G23) | incorrect benchmark for funds of funds (G23) |
| funds of funds (G23) | protective mechanism against poor investment choices (G11) |