Question - FOF

[CFAHouston]

This is pretty straightforward:

One of the main advantages to investing in a fund of funds (FOF) is that they can provide:

A) lower management fees.
B) a proven track record.
C) improved diversification of assets.
D) higher expected returns.

 

[financegal]

answer is c)improved diversification of assets.

 

[zimzim78]

nyc10041 Wrote:
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> a


Hellz no dude - as our instructor this weekend pointed out, you're paying a premium (kinda like paying admin fees twice, both for the mutual funds and then again for the FOF accounts) to have someone else manage this group of funds. You're getting double charged to reduce responsibility almost; the other two answers are just bunk IMO as there is no guarantee to performance, etc.


I agree with financegal as you're simply diversifying to the utmost level (you're getting a fund/group of mutual funds for your portfolio - C)

 

[noseykibitzer]

I try to think of a fund of funds like someone charging a wrap fee on top of the internal expenses for the funds in a 401K...its just another cost.

I'll go with C also...its like putting a bet on every horse in the race.

 

[CFAHouston]

C is correct.

Here's the answer:
FOF will actually have higher management fees because the FOF will charge a fee in addition to the fee charged by the hedge fund manager. Hedge funds selected by the FOF may have a good track record, but it is no indication of future performance. FOF actually have lower expected returns because of increased diversification. FOF can diversify across many types of hedge funds to decrease risk.

 

[jamespucyk]

This question has whack wording though, (it should be the most correct, not advanatage). As Houston pointed out A, B & D are all wrong, but this so called "advantage" is actually a bit of a disadvantage. The point of an FOF is to pick hedge funds that is performing well, but in general this actually results in diversification, which actually effectively limits or in some cases eliminates risk adjusted returns (Alpha), and that is the whole point of investing in a hedgefund; to generate alpha.