Article | Journal of Investment Management | Fourth Quarter 2008

Do Funds-of-Funds Deserve Their Extra Fees?

by Andrew Ang, Matthew Rhodes-Kropf and Rui Zhao


Since the after-fee returns of funds-of-funds are, on average, lower than hedge fund returns, it is easy to conclude that funds-of-funds do not add value compared to hedge funds. However, funds-of-funds should not be evaluated relative to hedge fund returns in publicly reported databases. Instead, the correct funds-of-funds benchmark is the set of direct hedge fund investments an investor could achieve on her own without recourse to funds-of-funds. We use asset allocation concepts to estimate characteristics of the funds-of-funds benchmark distribution. Since the benchmark characteristics are reasonable, we conclude that funds-of-funds, on average, deserve their fees-of-fees.

Keywords: Investment Funds; Investment Return; Value; Assets; Resource Allocation;


Ang, Andrew, Matthew Rhodes-Kropf, and Rui Zhao. "Do Funds-of-Funds Deserve Their Extra Fees?" Journal of Investment Management 6, no. 4 (Fourth Quarter 2008).