Fund of Hedge Funds Destroy Value Through Active Management - Report

Stephen Harris

14 December 2005

More fund of hedge funds add value through strategic allocation ability rather than through active management, according to a new study by French business school EDHEC. Fund of hedge funds are sometimes seen as suffering from a lack of transparency and a double-fee structure so investors are increasingly asking where is the value added? The new EDHEC study, “Determinants of Funds of Hedge Funds’ Performance”, has found that 89 per cent of funds of hedge funds add value at the strategic allocation level, but only 31 per cent at the active management level. Twenty per cent created value through both strategic allocation and active management. More worryingly, fund of hedge funds which add value through strategic style allocation often destroy value through active management, according to the report. The study also found that active management significantly increases volatility. The volatility of fund of hedge funds was found to be on average 24 per cent higher than the volatility of benchmarks. If they focused on strategic allocation, and as a result, stopped charging investors high incentive fees, FoHF would create much more value than they currently do, said the research.