LOS j: Explain the benefits and drawbacks to fund of funds investing.

Q1. One of the main advantages to investing in a fund of funds (FOF) is that FOF provide:

A)   higher expected returns.

B)   lower management fees.

C)   improved diversification of assets.

Q2. Samantha Gold is a young investor. She has many affluent friends who have made a lot of money by investing in hedge funds. Drawn by the significant potential returns, Gold has also decided to invest in hedge funds. A friend has suggested investing in a fund of funds, but Gold is concerned with the risks associated with such investing. Also, she is a relatively small investor compared to what she calls “the big hedge fund players.” Which of the following two statements, in combination, about fund of funds investing, when compared to investing in individual hedge funds is most accurate?

Benefit of Fund of Funds                                                  Drawback of Fund of Funds

A)      Provide returns that, on a risk-adjusted basis,

 are superior to investing in individual funds.        Only open to investors with significant capital.

B)Enable investors with limited capital to invest

 in a portfolio of hedge funds.                                      On a risk-adjusted basis, net-of-fees performance may

     be lower than that of individual funds.

B)      May grant investors access to highly

sought-after closed funds.                                    Returns are most likely going to be spent on additional management fees.

Q3. Which of the following statements best describes the fund-of-funds (FOF) class of hedge funds? A fund of funds:

A)   allows smaller investors to access the hedge funds market.

B)   is an open-end mutual fund that primarily invests in other open-end funds.

C)   is open to institutional investors for the purpose of seeking arbitrage situations in hedge fund pricing.

Q4. Which of the following statements regarding fund of funds (FOF) is FALSE?

A)   The higher diversification of a FOF can lead to lower expected returns.

B)   FOF have consistently delivered high returns to investors.

C)   FOF may be able to offer access to hedge funds that are closed to new, individual investors.

LOS j: Explain the benefits and drawbacks to fund of funds investing. fficeffice" />

Q1. One of the main advantages to investing in a fund of funds (FOF) is that FOF provide:

A)   higher expected returns.

B)   lower management fees.

C)   improved diversification of assets.

Correct answer is C)

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. FOF actually have lower expected returns because of increased diversification. FOF can diversify across many hedge funds strategies to decrease risk

Q2. Samantha Gold is a young investor. She has many affluent friends who have made a lot of money by investing in hedge funds. Drawn by the significant potential returns, Gold has also decided to invest in hedge funds. A friend has suggested investing in a fund of funds, but Gold is concerned with the risks associated with such investing. Also, she is a relatively small investor compared to what she calls “the big hedge fund players.” Which of the following two statements, in combination, about fund of funds investing, when compared to investing in individual hedge funds is most accurate?

Benefit of Fund of Funds                                                  Drawback of Fund of Funds

A)      Provide returns that, on a risk-adjusted basis,

 are superior to investing in individual funds.        Only open to investors with significant capital.

B)Enable investors with limited capital to invest

 in a portfolio of hedge funds.                                      On a risk-adjusted basis, net-of-fees performance may

     be lower than that of individual funds.

B)      May grant investors access to highly

sought-after closed funds.                                    Returns are most likely going to be spent on additional management fees.

Correct answer is B)

Fund of funds enable investors with limited capital to invest in a portfolio of hedge funds. Usually, a portfolio of hedge funds will decrease the total variability of the returns of the funds comprising the portfolio. Because a fund of funds structure adds an additional layer of management fees, the actual returns may be lower than the returns that investors could achieve by selecting and investing in individual funds themselves.

Q3. Which of the following statements best describes the fund-of-funds (FOF) class of hedge funds? A fund of funds:

A)   allows smaller investors to access the hedge funds market.

B)   is an open-end mutual fund that primarily invests in other open-end funds.

C)   is open to institutional investors for the purpose of seeking arbitrage situations in hedge fund pricing.

Correct answer is A)

A FOF is a fund that invests in hedge funds. They are open to both individual and institutional investors

Q4. Which of the following statements regarding fund of funds (FOF) is FALSE?

A)   The higher diversification of a FOF can lead to lower expected returns.

B)   FOF have consistently delivered high returns to investors.

C)   FOF may be able to offer access to hedge funds that are closed to new, individual investors.

Correct answer is B)        

FOFs may have established accounts with hedge funds that are closed to new investors but are accepting investments from existing investors. Because FOFs invest in many hedge funds, the increased diversification can decrease expected returns. FOFs do not have a proven track record, although they now compose more than a quarter of hedge fund assets.

thanks