Questions to Ask Before Investing in a Fund of Hedge Funds

(I)  Ask yourself:

  • How long can you put aside the money?
  • What sort of returns do you expect to get from the investment each year?
  • How do you define risk: Losing some or all of the investment? Getting less than the savings rate? Unable to get funds within a short period of time?
  • How much risk can you tolerate?
  • What percentage of your liquid assets do you plan to allocate to hedge funds?
  • Do you accept the fact that you are investing into the skills of the manager of the FoHFs as well as the skills of the managers of the baby funds?
  • Do you accept the fact that the returns of a FoHFs is not tied to the returns of the markets that the FoHFs is involved in? That means a rally in the underlying markets of a FoHFs may not necessarily cause your FoHFs investment to go up in value, or vice versa in a down market.
     

(II)  Ask the distributor:

(a)  About the fund manager:

  • Who is the fund manager? How long has the fund manager been managing hedge funds generally and how long has he/she managed this particular FoHFs?
  • Does the fund manager invest in the FoHFs himself/herself? If yes, what percentage of the asset is it from the manager?
  • How many FoHFs does this fund manager manage?
  • What is the total asset size of FoHFs being managed by the fund manager?
  • How many staff are in the FoHFs management group? How many are involved in the investment/manager selection process?
  • Will you keep track of whether or not key people in the FoHFs management group leave?
  • If the FoHFs management group loses key people, will you let me know?


(b)  About the Fund of Hedge Funds (FoHFs):

  • Basics and Investment objective
  • What is the minimum investment of the FoHFs?
  • What are the investment objectives of the FoHFs?
  • When was the FoHFs set up?
  • What is the current asset size of the FoHFs? How does it compare with the size at inception?


Investment Strategy

  • What are the strategies allowed in this FoHFs?
  • How does each of these strategies generate profits? What are the biggest risk factors for each strategy? What kind of economic and market conditions are favorable for each of the strategies?


Baby funds

  • How many baby funds does the FoHFs usually invest in?
  • How does the fund manager select the baby funds?
  • Does the FoHFs use internal or affiliated managers?
  • Does the FoHFs use macro managers?
  • Does the FoHFs use capacity constrained managers such as distressed and emerging markets funds?
  • How does the fund manager monitor and evaluate the performance of the baby funds?
  • Does the FoHFs receive fee rebates from the baby fund managers?
  • Can we have access to the information on the baby funds?


Risk/Return

  • What can I expect from this FoHFs, in terms of risk/reward?
  • How do I determine when is the best time to buy this FoHFs? And to redeem?
  • How much do you recommend to hold FoHFs in one's liquid investment portfolio?
     

Performance

  • What is the performance (since inception, year-on-year) and volatility of the FoHFs since inception?
  • What is the maximum peak to trough loss that this FoHFs has ever sustained?
  • How did the FoHFs perform at major events such as the Asian Crisis and 911?
  • After I buy the FoHFs, how do I check the performance? What information will I receive from the fund manager/distributor and how often?
  • If there is a market crisis or if the FoHFs suffers a big loss, how do I get information to determine whether or not I should stay in this FoHFs?


Fees & Charges

  • What are the fees that I have to pay, e.g. up-front fee, redemption fee, management fee, performance fee, etc.? Do these already cover fees charged by both the mother and baby funds? How are fees calculated (e.g. is it based on a % of the assets) and how often do I have to pay such fees?
     

Dealing

  • What is the dealing frequency of the FoHFs? How do I buy and sell?
  • How long would it take before I can get back my money after I send in full redemption documentation?
  • Will the money be earning interest before full redemption takes place?


(c)  About the distributor:

  • What is your experience in assessing a FoHFs?
  • Have you done any original research into this particular FoHFs or have you simply relied on the information provided by the FoHFs manager?


If you have any queries or wish to obtain more information on fund investment or the Hong Kong fund management industry after browsing our site, please email us at hkifa@hkifa.org.hk.