TY - JOUR AU - Brown,Stephen J. AU - Goetzmann,William N. AU - Liang,Bing TI - Fees on Fees in Funds of Funds JF - National Bureau of Economic Research Working Paper Series VL - No. 9464 PY - 2003 Y2 - February 2003 UR - http://www.nber.org/papers/w9464 L1 - http://www.nber.org/papers/w9464.pdf N1 - Author contact info: Stephen J. Brown Stern School of Business New York University New York, NY 10012 Tel: 718 273 0317 Fax: 718 981 7239 E-Mail: sbrown@stern.nyu.edu William N. Goetzmann School of Management Yale University Box 208200 New Haven, CT 06520-8200 Tel: 203/432-5950 Fax: 203/432-3003 E-Mail: william.goetzmann@yale.edu Bing Liang Isenberg School of Management University of Massachusetts Amherst Amherst, MA 01002 Tel: (413) 545-3180 Fax: (413) 545-3858 E-Mail: bliang@isenberg.umass.edu AB - Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manaager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of fees paid by the investor. One would expect that the information advantage of funds of funds would more than compensate investors for these fees. Unfortunately, individual hedge funds dominate fund of funds on an after-fee return or Sharpe ratio basis. In this paper we argue that the disappointing after-fee performance of some fund of funds may be explained by the nature of this fee arrangement. Fund of funds providers pass on individual hedge fund incentive fees in the form of after-fee returns, although they are in a better position to hedge these fees than are their investors. We examine a new fee arrangement emerging in the industry that may provide better incentives at a lower cost to investors in these funds. ER -