Funds Of Hedge Funds: Profits Of Gloom?

Date: Tuesday, December 19, 2006
Author: Dailyii.com

No one questions an investment bank's and securities firm's right to make money, but Bloomberg News is suggesting that its one of Wall Street's "dirty secrets" that it would be nice if the funds of hedge funds they operate could make some for investors as well as the Street. Despite the fact major investment banks and securities firms--such as Goldman Sachs, Morgan Stanley, JP Morgan Chase and Citigroup, among others--make up about one-fifth of the world's largest fund of hedge funds operators, their performance not only lags behind other FoHFs, but they make a mint in the process. According to Bloomberg, securities firms will rake in more than $1 billion fees, as a result of their double-fee pricing structure--for returns that in some cases are no better than U.S. Treasury bonds. Performance at these firms has been described as "mixed," and to illustrate its point, Bloomberg notes that investors would have taken home more money had they invested in shares of Goldman Sachs (up 56% this year), than, for example, in GS' Hedge Fund Partners, which made 5.6% through October, while its Global Tactical Trading Fund, stood at 1.7% by then. "The layering of fees makes it difficult to produce the type of returns that investors are hoping for," Geoff Bobroff, a consultant in East Greenwich, R.I., said in a Bloomberg interview. Perhaps more distressing for investors is that investment banks realize they can get away with hiring fewer professionals to handle FoHF investments than a traditional hedge fund, and then get lazy. "Some firms have decided it's hard to add value choosing underlying funds," Edward Bowman of Pennsylvania-based Veritable said, so they don't bother picking. They just hire a bunch of managers." For these large FoHF operators, Bowman added, "gathering assets is the name of the game, not performance." Despite the revelations, some institutional investors remain confident in their choice. "I have an extremely high regard for the quality of service at Goldman," Orin Kramer, who chairs the New Jersey State Investment Council, told Bloomberg.