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

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Yale endowment manager David Swensen set off alarms throughout the investment community with the following remarks, which he provided in a January 13 interview with Wall Street Journal reporter Craig Karmin:

WSJ: What about fund of funds and consultants? Can they be a solution?

Mr. Swensen: Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can't make an intelligent decision about picking managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds? There's also more fees on top of existing fees. And the best managers don't want fund-of-fund money because it is unreliable. You need to be in the top 10% of hedge funds to succeed. In a fund of funds, you will likely be excluded from the best managers. [Mr.] Madoff also relied enormously on these intermediaries. He wouldn't have had nearly as much resources were it not for fund of funds.

Consultants make money by giving advice to as many people as possible. But you outperform by finding inefficiencies most of the market has not yet uncovered. So consultants ultimately end up doing a disservice to investors.

We believe Swensen’s arguments are misplaced.  The data show hedge funds of funds performed extremely well during the challenging environment of 2008:



2008 Return

2008 Std Dev (1)

S&P 500



MSCI World



HFRI Fund of Funds: Composite Index (2)



HFRI Fund of Funds: Diversified Index (3)






See notes at end of article.

Those investors Swensen characterizes as ignorant not only significantly outperformed broad-based indices in 2008, they also outperformed Yale’s endowment.  Moreover, much of Yale’s money is invested in private equity deals that are infamously priced (marked) in a very generous manner. Many suspect Yale is down 30-35%, not the 25% Swensen suggests.

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