David Swensen Speaks Out:
Are Hedge Funds of Funds a Cancer?
Robert Huebscher
January 20, 2009

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Professional management, such as that offered by funds of funds, is worth a fee, and the "assembly charge" used to build portfolios can either be a bargain or a rip-off depending on (1) the skill of the assembler and (2) the size of the fee.   Our article, Don’t Pay Alpha Fees for Beta Performance, examines the key issues in the selection process – for example, whether funds are using leverage to disguise beta as alpha.  The data above suggests that fund of funds managers are able to select skilled managers and reject the less skilled ones. 

Taking Swensen’s arguments to the extreme would lead to the conclusion that mutual funds are a cancer on the individual-investor world.  Swensen would argue that, if you can't even decide which stocks to own, how can you decide which mutual fund to invest in?  They are a conduit for ignorant investors...

We don’t accept this view of the mutual fund industry, and see no reason to accept Swensen’s view of the hedge fund of funds industry.

Finally, we provide a response written by Ken Phillips, who runs a hedge fund of funds:

Mr. Swenson’s sheltered and hubris views are, more appropriately, a “cancer on the institutional – investor world.” That Yale has elected to internally develop a large and expensive investment team, rather than retain outside advisors, is testimony to the many complex issues facing investors. Rather than pay a fee to an independent, experienced, and objective consultant, Mr. Swenson has taken those same monies and formed his own proprietary team, saving little in the long run and potentially compromising his objectivity as a Fiduciary. Although this financial option may be available to the largest institutions, it is not available to everyone; suggesting that all other investors be banished to the world of passive investing is naïve and foolish. Shame on Mr. Swenson for bullying and maligning investment consultants, an industry that for more than forty years has placed the interests of investors before its own. Hopefully the future performance of the Yale Endowment will allow Mr. Swenson to differentiate his returns from those of the masses – during 2008, a great test of skill, the average fund-of-hedge-funds, with the burden of their fees and purportedly less brilliant management, has meaningfully beaten his bogey.

Kenneth S. Phillips
RCG Capital Partners, LLC
One Boulder Plaza
1301 Canyon Blvd.
Boulder, Colorado 80302


  1. Monthly Standard Deviation Annualized
  2. Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio. A manager may allocate funds to numerous managers within a single strategy, or with numerous managers in multiple strategies. The minimum investment in a Fund of Funds may be lower than an investment in an individual hedge fund or managed account. The investor has the advantage of diversification among managers and styles with significantly less capital than investing with separate managers.
  3. Funds of funds classified as "Diversified" exhibit one or more of the following characteristics: invests in a variety of strategies among multiple managers; historical annual return and/or a standard deviation generally similar to the HFRI Fund of Fund Composite index; demonstrates generally close performance and returns distribution correlation to the HFRI Fund of Fund Composite Index. A fund in the HFRI FOF Diversified Index tends to show minimal loss in down markets while achieving superior returns in up markets.

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