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January 21, 2006
Understanding the demarcation between fund of funds and hedge funds
Any investment fund that is not a conventional investment fund, is termed as a hedge fund. Essentially, hedge funds use a strategy or a set of strategies other than investing long in bonds, equities, mutual funds, and money markets. On the other hand, a fund of funds is a combination of successful hedge funds and other pooled investment vehicles. As a result, in case of fund of funds, the investment is spread across different funds or investment vehicles.
Hedge fund strategies are quite complicated and the returns and risk are varied. The returns and risks also depend on individual managers. In case of fund of funds, the process of selecting hedge funds is simplified as a number of funds are blended together to meet diverse needs of investors in terms of risks and returns. This makes the returns more consistent than in the case of individual funds.
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