by Guinandra Jatikusumo
If you were a High Net Worth Individual seeking to invest in alternative assets, specifically in private equity or venture capitalist funds, is it worthwhile to do it via a fund-of-funds? A graph I took from a book I recently read suggests a yes to the question posed:
In line with the fundamental portfolio theory, it provides you, as the investor, with diversification benefits that may lead to higher investment returns or exit multiples. The only looming problem is the aggregate fee associated with hiring a fund-of-funds manager to help you invest in funds you’d like to invest in. I’m not sure about how a PE/VC fund-of-funds fee structure looks like, but research by Columbia University found that fees for funds-of-funds focusing on hedge fund investments to be arguably overcompensated.
A fund-of- funds passes onto investors all fees charged by the underlying hedge funds in the fund-of- funds’ portfolio. In addition, investors in funds-of-funds must also pay an extra set of fees to compensate the funds-of-funds’ managers. These fees-on-fees are not negligible. In the TASS database, the average management fee levied by funds-of-funds is 1.5% and the average fund- of-funds’ incentive fee is over 9.2%. These fees are on top of an average management fee of 1.4% and an average incentive fee of 18.4% for hedge funds.