Advantages and Disadvantages of a Fund of Hedge Funds

In the prior post, I listed some of the advantages of investing in a fund of hedge funds as opposed to directly investing into a hedge fund.  The following may be added to that list:

• Regulation - Fund of hedge funds may be registered in countries that offer better investor protection
• Hedge currency - Offer shares in different currencies
• Leverage - Can provide leverage to investors
• Education - Teach investors about hedge funds

There was one disadvantage listed - the double layer of fees.  Additionally, there are:

• Performance fees - Calculated based on individual positions of the fund;  not on aggregate return
• Higher taxes - Because hedge funds can register as offshore funds
• Effects on other investors' actions - Redemptions and investments by other investors may change cash flow, leverage or fund manager's investment style due to monthly liquidity
• Control and customization - Ceded to the fund manager
• Lower returns - Due to lower risk