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Is a Fund of Hedge Funds Right for You?
Hedge funds are quite popular today among investors. Their popularity has also given rise to a proliferation of fund of hedge funds, which is a fund that holds various hedge funds in one portfolio. A fund of hedge funds is a type of fund of funds, which simply refers to an investment strategy that is comprised of many investment schemes rather than directly investing in bonds, stocks, and other securities. Thus, fund of funds can give investors access to a wide range of investment strategies in a single portfolio.
A Fund of Hedge Funds Offers Greater Diversification
A fund of hedge funds or fund of mutual funds may be preferred to investing in hedge funds or mutual funds directly, as the individual funds may be closed to new investors or require a high minimum investment level. Moreover, these investment vehicles are sometimes much more complicated and have higher risk than traditional equity investments. With a fund of hedge funds, fund managers actively select the appropriate hedge funds for the portfolio, so individual investors do not have to waste great effort or time in doing their own research.
Investing in a fund of hedge funds can give investors greater diversification than if the investors invest in a very small range of securities directly. The manager of the fund of hedge funds has a variety of resources to use to choose the best-performing hedge funds to include in the portfolio. The resources might help in analyzing past performance, the correlation with other funds, and other features. A higher diversification level can also lead to greater stability in the fund of hedge funds, though it should be noted no investment is without risk.
The level of management of fund of hedge funds is relatively high compared to other traditional investments, as managers must continuously review the portfolio and consider new funds to include. A good manager will screen the hedge fund candidates for levels of risk, performance, and value-add to the portfolio. The manager of the fund of hedge funds will do the proper due diligence to make sure all the included hedge funds are legitimate and each has a strategy with merit. Of course, this is no substitute for investors to conduct their own due diligence into the fund of hedge funds and the hedge funds included in the fund of funds.
Hedge funds are considered more risky than bonds or stocks, because they often have complicated strategies that target certain market movements and trends. Their complexity makes them inaccessible to some novice investors, thus investing in a fund of hedge funds can be a viable alternative. The manager of a fund of hedge funds should take most of the work out of the equation for individual investors. When investors evaluate which fund of hedge funds to invest in, they should read the fund’s prospectus to understand the level of the risk in investing in the fund. Investors should also make sure they understand all fees, the performance track record, and the overall strategy. Investors can find a wealth of information on fund of hedge funds online, as well as use the Internet to find the fund of hedge funds they might be interested in.
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