David Swensen on fund of funds
Posted by: Michael Zhuang on: January 17, 2010
Quoted from David Swensen’s interview with WJS …
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.
What do you think? Is it too strong a statement? Or is it right on target? Please share your thought.
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4 Responses to "David Swensen on fund of funds"
[...] for investors, but to gather assets from them for less-than-stellar hedge funds. No wonder David Swensen called them “cancer” of the institutional investment [...]
[...] June 6, 2010 by Belray Asset Management Leave a Comment Quoted from David Swensen's interview with WJS … 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 be … Read More [...]
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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm applying David Swensen's insights for clients. He is also a regular contributor to Morningstar Advisor. To use his wealth management services, schedule a discovery meeting (phone call) with him.
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February 2, 2010 at 6:55 pm
What about lifestyle funds by the large fund families (Vanguard, Fidelity, and T. Rowe Price)? These fund-of-funds
1. Don’t charge the double management fees normally associated with fund-of-funds because the underlying funds are in the same fund family
2. Provide a sound product for people who are concerned about investing for retirement, but are not committed to managing their own asset allocation and otherwise would invest unwisely
True, we should all manage our own portfolios, but that’s not going to happen. A practical solution for most Americans is a lifestyle fund managed by one of the large fund families. This puts them on the right path and many steps a heard of most Americans.
February 2, 2010 at 7:45 pm
I agree totally. When David Swensen decried fund of funds, I am sure he did not mean life style funds, particularly those offered by Vanguard which do not have an added layer of management fees.