Selecting a fund of funds
portfolio institutional spoke to Chris Jones, head of alter natives at bfinance, and former chief investment officer at fund of hedge funds Key Asset Management, about how to identify a good, institutional-quality fund of hedge funds.
How can institutional investors ensure they choose a good fund of hedge funds?
Seek evidence they run a decent process, managed by skilled people with long track records, that is proven to be effective. Make sure they do what they say by looking at who they have hired and fi red and how they performed in specific environments. Select several managers they have performed due diligence on and demand those records immediately. I don’t see why they wouldn’t be transparent on this. Do your due diligence, be sure they genuinely add value and don’t just wave people through.
Many funds of funds were accused of waving Madoff through. Is Madoff exposure an acid test for funds of funds’ operational due diligence?
I can’t see how their process can be effective if they selected Madoff. Madoff wasn’t a big surprise. For years people thought his returns were too good to be true. Any fund of funds with Madoff exposure will be on a back foot in proving the effectiveness of their system. Equally, good operational due diligence should have picked up on issues at Weavering Capital. Experience is really important, which is why a team’s skill and track record is critical. If you don’t understand the risk, how can you tell if they are worth the reward?
How often should a fund of funds provider be reviewed?
If you invest with a fund of funds, don’t think your problems are solved. Seek proof they are delivering on an on-going basis. Outsourcing can itself be a source of risk.
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