Fund of Hedge Funds

Rather than investing directly in specific securities, a fund of hedge funds allocates its capital to single-manager hedge funds, which then invest that capital as they would any other investment from a Limited Partner (LP). There are two main categories of fund of funds: diversified, in which assets are invested in various types of hedge funds, and niche, which invest in hedge funds with the same investment strategy. Fund of funds have grown considerably over the past few years to the point where they currently account for a significant portion of the overall hedge fund market. Working at a fund of hedge funds is very different than at a single-manager fund. At a fund of funds, analysts are not involved in direct investments; they focus most of their time on researching and monitoring managers of the hedge funds in which the fund of funds allocates capital. They focus on the managers’ backgrounds, reputations, and the types of investments they make, as well as a host of quantitative analyses such as risk-adjusted returns and volatility.