Determinants of Funds of Hedge Funds' Performance

This is all the more striking in that funds of funds are far from transparent and, with their double-fee structure, are relatively costly investment vehicles. Our objective in this paper is to fill the gap and find out whether funds of funds add value through strategic allocation and active management. To this end, we ran a RBSA on a sample of 97 funds of funds over 1997/2004.  89% of the funds of funds turned out to add value at the strategic allocation level but only 31% at the active management level. Finally, only 20% of funds of funds created value through both strategic allocation and active management. In other words, if picking the best performing funds is a challenging task, picking the best performing funds of funds appears to be equally difficult.