Chapter 29 - Funds of Hedge Funds and the Principles of Fiduciary Investing Following the Global Financial Crisis

Abstract

Funds of hedge funds (FoHFs) are an increasingly common way for institutional investors as well as high-net-worth individuals to access the hedge fund sector. Unsurprisingly, there have been renewed calls in the wake of the global financial crisis to subject the hedge fund sector to greater regulatory scrutiny, but this has not undermined the role played by FoHFs in intermediating between investors and hedge funds. A FoHF is, in essence, a ‘feeder’ structure that aggregates the contributions of the investors in the FoHF and allocates that capital across a broad pool of hedge funds. In this manner, an investor can efficiently obtain exposure to a diversified portfolio of hedge fund managers and hedge fund investment styles. This chapter examines the impact of the global financial crisis on the fiduciary principles that apply to many of these investors (such as pension funds, family offices, and endowments) when selecting FoHFs and also on the actual design of FoHFs.