＜Characteristics of Fund of Funds #2 Disadvantages＞
Today’s post discusses the disadvantages of FOFs.
３．Higher management fees.
Let’ s take a look at 1.
This does not mean that all FOFs are not transparent to disclosures. Even, nowadays, disclosures on hedge funds have significantly improved. Despite such efforts by the industry, some hedge fund managers are not willing to disclose the details of their strategies due to hurting their performance and elevation of the disclosure costs.
Thus, a FOFs that invests in such low-disclosed hedge funds will be less transparent for investors. This happens not only to the hedge funds but also to so-called “Wrap funds”, which are popular FOFs type funds in Japan. Among these wrap funds, there is a lot of funds that do not disclose how the performance goes and the portfolio is constructed in an investors-friendly manner.
2 point out that, in other words, a degree of liquidity of the FOFs will not be higher than the underlying hedge funds invested in the FOFs. For example, when a FOFs invest in the funds with both monthly and quarterly redemption allowed, the liquidity of the fund will be quarterly. For investors who usually need more liquidity in single hedge funds, a FOFs that is less liquid should be a matter to be understood well beforehand.
Regarding 3, higher management fees are the weakness of both hedge funds and mutual funds. Hedge funds usually apply management fees and performance fees. And, FOFs levies another management fee on those underlying funds. Therefore, the total fee level of FOFs is higher than the single funds.
So, I strongly recommend investors judge whether a FOFs you are going to invest in will be able to outperform and meet your expected liquidity and overall costs.