When Fund of Funds Work

Terry Flanagan

Management fees for hedge funds and hedge fund of funds have caused alternative vehicles to come heavily under fire in recent years, but some strategy-specific managers fight back.

Fund of funds across the alternative investment spectrum has been under fire as investors have become more wary of how, and with whom, they spend their money. Increased scrutiny over hedge funds at large began with the 2008 financial crisis, but continues today as market volatility persistently puts investors at unease.

Fund of funds, especially have come under criticism for charging extra fees to compile managers, propelling many large institutions to invest in direct hedge fund programs. Yet, for managed futures managers, a winning alternative strategy in 2011, a fund of fund vehicle can provide investors with much more diversity than a single fund.

“We have over 20 CTAs (commodity trading advisors) in our Futures Strategy Fund,” said Greg Anderson, chief investment officer of Princeton Fund Advisors. The firm’s Futures Strategy Fund is offered through a limited partnership structure.

“We have managers short term in nature, intermediate term, and long-term…all seeking differences in returns because of their different time horizons. We have managers that are contrarian to the trend, meaning they’re not in the market and go the opposite way when something is trending. We offer a wide range through our fund of fund, just so that our portfolio gets diversification.”

While managed futures outperformed many other hedge fund strategies in 2011, up 2%, while others lost significantly, they are known for high operating costs due to the proprietary systems they use to invest and trade. For Jon Sundt, chief executive of $1.2 billion Altegris Investments, these systems, and more importantly, the talent who operate them, are worth the high prices.

“There are a variety of ways you can get access to managed futures,” Sundt said. “You can get access through an index replication strategy, with an investment manager that hires his own team and doesn’t have an incentive fee, or you can outsource management.”

“We are open architecture, looking at the entire universe of managed futures managers and selecting the best…some of these managers wouldn’t work for us, such as a 7.5 billion firm based in London. But, we want to deliver a blend of the best of breed managers to the market. There’s a charge for the guy that is returning 15% over 12 years, and it’s worth the price.”

For most managed futures shops, charges can include the typical “2 and 20” hedge fund management fee, or “130 and 30” for specialty mutual funds, according to Sundt.

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