NEW GENERATION OF HEDGE FUNDS
FoHFs are still the best solution for hedge funds investmentsRG Funds of hedge funds (FoHF) have recently been subject to fierce debates. At this point, we want to glance ahead, because we can influence the future by drawing the right lessons from the past. The benefits of FoHFs are obvious: • Diversification: Lower risk compared to single hedge funds • Access to hedge funds: Single hedge funds (in particular the successful ones) are partly closed to new subscriptions or demand high minimum subscriptions that often exceed the financial resources of potential investors • Delegation of investment decisions to experts • Thorough due diligence The double fee structure is often put forward as an argument against FoHFs. This point of criticism, however, is invalid. Returns of FoHFs are always shown net of fees and, therefore, they are directly comparable to the returns of single hedge funds. Often there are false expectations concerning FoHFs. Their mission is not to outperform bull markets but to generate marketneutral and uncorrelated alpha. The Madoff case has also been very detrimental to the hedge fund business as a whole. It has to be recalled, however, that Madoff was not a hedge fund but a brokerdealer. As a result, the FoHF industry was subjected to a strong consolidation during the last years. A market shakeout, though, has its advantages regarding „natural selection“. Moreover, it provides room for new initiatives. Thus, we are firmly convinced that after seven „poor years“, there will be seven „wealthy years“ and that a comeback of FoHFs is imminent. However, a prerequisite for this is that the new generation of FoHFs draws the right conclusions from the events in 2008. The most important lesson consists in refocusing on the roots of hedge fund investing.
39 FAMILY OFFICE ELITE MAGAZINE
Miranda Ademaj
Skënderbeg Alternative Investments AG
Desirable qualities • Designed to avoid most of the downside and capture a good portion of the upside • “Original”, decorrelated returns • Take advantage of anomalies or “smart beta” • Exploit selection skill • Favor pure alpha bets (market-neutral) • Seek defensive payoff patterns • Self-investment: the manager is expected to put some of his own capital at risk Undesirable qualities • Russian roulette: short put bets • Leveraged beta strategies • Poor odds of success • Black boxes • Beta masquerading as alpha • Active products managed by lucky fool • Unfavorable sharing ratios • Obsessive focus on benchmark replication • Excessive leverage In recent years, many institutional investors turned their backs on FoHFs and tried to invest directly in