Do Funds of Hedge Funds Really Add Value?

In spite of a somewhat disappointing performance throughout the crisis, and a series of highprofile scandals, investors are showing interest in hedge funds.

Author(s):

Serge DarollesPhD,

Research Fellow at CREST, Deputy Head of Lyxor Asset ManagementResearch and Development Department

Mathieu Vaissie

PhD, Research Associate, EDHEC-Risk Institute, Senior Portfolio Managerat Lyxor Asset Management

Still, funds of hedge funds keep on experiencing outflows. Can this phenomenon be explained by the failure of fund of hedge fund managers to deliver on their promise to add value through active management, or is it symptomatic of a move toward greater disintermediation in the hedge fund industry? Little attention has been paid so far to the added value, and the sources of the added value, of funds of hedge funds. The lack of transparency that is characteristic of the hedge funds arena and makes the performance attribution exercise particularly challenging is probably an explanation. The objective of this article is to fill in the gap. We introduce to this end a return-based attribution model allowing for a full decomposition of fund of hedge fund performance. The results of our empirical study suggest that funds of hedge funds are funds of funds like others. Strategic allocation turns out to be a crucial step in the investment process, in that it not only adds value over the long term, but most importantly, it brings resilience precisely when investors need it the most. Fund picking, on the other hand, turns out to be a double-edged sword. Overall, funds of hedge funds appear to succeed in overcoming their double fee structure, and add value across market regimes, although to varying degrees and in different forms.
Pdf
Do Funds of Hedge Funds Really Add Value?...
(-1.00 B)
Type: Working paper
Date: le 22/09/2010
Extra information : For more information, please contact Joanne Finlay, EDHEC Research and Development Department [ joanne.finlay@edhec.edu ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Research Cluster : Finance

See Also

LegalEDHEC present to foster legal innovation
News
- 20-06-2018
On major political subjects, as well as on legal innovation, the LegalEDHEC Research...
 THE ECONOMETRIC SOCIETY - NORTH AMERICA SUMMER MEETING - June 2018
News
- 19-06-2018
Two PhD in Finance alumni Andrea Tarelli, PhD (2014) and François Cocquemas, PhD (2016...
Great success for the 25th EDHEC Raid
News
- 19-06-2018
"A big thank you to the whole Raid EDHEC team! A top team for an incredible raid. I can...
EDHEC ranked in the world’s top 3 business schools for Finance by the Financial Times
News
- 18-06-2018
EDHEC Business School has consolidated its standing in the Financial Times global...