Why work at a Fund of Funds?

Besides having no where else to work or looking for a stepping stone. I don't know much about the actual work done at a FoF. Got a random interview with one from a recruiter and decided to go for it for practice, at least.

I enjoy doing fundamental work, and I feel like working at a FoF would just remove me from what I'm good at. I'm not a fan of Modern Portfolio Theory.

 

I currently work in FoF > $1B and my biggest issue with it is the absence of a skill set. You will get really good at manager due diligence/operations/accounting/sending money...which I guess could be interesting to you depending on what you want to do in life? A pro is that you are pitched by people who you would love to work for...You try to quantify the alpha added by the managers; however, by the time you get data it's already dated (unless you're under hedge funds/public equities/fixed income). If the fund partakes in assets (mineral rights, etc) or private equity you can expect a lag anywhere from 1-3 months on financials. It would really come down to what your responsibilities would be. I always find myself thinking it would be a good place to work instead of giving into retirement. The biggest benefit to the client is the exposure to alternative investments in a fashion that claims to mitigate risk.

One important note: where I work doesn't really serve any "clients". I can't imagine how I would feel about my job if I had to worry about client relationships, etc.

 

I haven't even been told what the position is about, but I'm assuming DD. These guys keep things pretty close.

GodofWine: Are you looking to leave? How do you feel about exit ops? You're take on the matter is what I would expect. It seems like a possible stepping stone, but if you're not acquiring any useful skills for another position, why would you be hired over someone with a more pertinent background?

 

1) Yes. 2) I don't know enough about exit ops to comment. The people that work there have been there for awhile and will most likely stay for awhile. I think the best possible chance they have is to go from an analyst to a manager and then lateral to a fund of some sort. The most likely candidate is a mutual fund in my eyes. 3) I don't see this being a good way to build a skill set; however, I could see it being a good way to make contacts if you play your cards right...

 

Update:

It's an asset allocation position, which will primarily be manager DD, but also analysis for some co-investing. Apparently they were actually looking for someone like me because they need help on the co-investing. I was certainly more impressed than I expected.

I'm still wondering though if I would be better served waiting for a direct investing opportunity. The comp is probably enough to outweigh immediate considerations, but I worry about longer-term prospects.

 
AlsatianCousin:
This topic is super helpful. I have an interview with a FOF soon, and I honestly don't know what to expect as I've only had PWM experience.

From what GodofWine posted, FOF doesn't sound too great. Am I wrong in saying so?

Your picture makes me feel like I need a fucking shower.
If I had asked people what they wanted, they would have said faster horses - Henry Ford
 
happypantsmcgee:
AlsatianCousin:
This topic is super helpful. I have an interview with a FOF soon, and I honestly don't know what to expect as I've only had PWM experience.

From what GodofWine posted, FOF doesn't sound too great. Am I wrong in saying so?

Your picture makes me feel like I need a fucking shower.

Morrissey always needs one.

 

God of Wine/Freemarketeer,

Would you mind sharing some of the interview questions you have received? Also I have been told it's always better to stay on the investment side than to do operational DD or fundraising/placement so referring to Relinquis's question above how do you leverage the network/contacts you build up through FoF for exit opp?

 

Nothing special, really. "Tell me about a stock you cover". Had to talk through the idea, go through the overview, fundamentals, etc. The questions were a minority of the interview. I actually spent more time asking questions than he did.

What really threw me for a loop was his warning that going to a FoF is a bad idea if you want to get to a direct investing role eventually. He made it clear he tried and couldn't get out. I semi-tried to dodge the question when he asked me if I was ok with that, but I think he knew I didn't really want the job.

 
God of Wine:

My interviews included statistics, options and futures, general overview of what PE, HF, FI, public equities and real assets are. It was 5 people back to back.

sounds kind of intense. was it as simple as knowing what those assets are or did it get more technical? also was your interview out of school or were you an experienced hire?

 

imo unless it's a family office working w/ a FoF mindset, the FoF model as a standalone fund built on client asset is increasingly becoming difficult to justify. especially given that the industry fees are now being lowered... the cut FoF receives will also get smaller.

 

1) Consolidation in the industry - FOF's have been shrinking post crisis and I think will continue to do so as allocators get more sophisticated and decide not to pay the hedge funds individually and FOF fees on top.

2) Depending on the FOF, you may be taking on a lot less risk than you'd prefer to and end up with all big hedge names in your portfolio. FOF doesn't want to risk putting a ton of money into a tiny hedge fund that has the potential to blow up and run up huge losses and lose clients. So you may not be sourcing the best small managers and working on the most interesting stuff - it might just be staying up to date w/ Pershing Square, Och Ziff, etc.

3) Exit Opps - not saying there aren't good ones, just know that working at an FOF may not be a 40 year career.

 

the industry is under a ton of fee pressure and its core service (ie advisory/ratings on hedge funds), while necessary, is becoming largely commoditized, something investors used to pay a lot for that they can now pay almost nothing for, which leads to myriad problems for FOF employees - comp under pressure, consolidation in the industry = fewer good jobs, and (as opposed to the poster above) I think FOF are starting to take risks they are unqualified to take in order to differentiate themserlves and justify their fees - ie making direct coinvestments they don't have the skill to vet, size, manage --seeding funds that are likely to fail because most FOF dont have the capital or infrastructure to properly support them -- concentrating in high vol, niche, or illiquid (or all of the above) funds to try to achieve high returns that justify their fees but usually just blow up, etc.

Best advice is use your seat to network a lot and figure out what your next step will be (ie move to a direct investor like a pension or endowment, a broader asset allocation/investment management seat, a sales/IR seat, etc) and aggressively pursue that next step after a couple of years

 

Thanks for the advice! The comp/lifestyle dynamic works for me in the short run and I'm planning on exiting finance in ~5 years, but I think your point is pretty valid.

Life's is a tale told by an idiot, full of sound and fury, signifying nothing.
 

Is $200K total comp you're expecting to get including year-end bonus or just base? If the latter, very hard to believe since fund-of-funds in general don't pay that well, especially for a 24-year old kid.

But to echo the comments made earlier, most fund-of-funds are pretty boring since you're just keeping up to date with current managers, dealing with client inquiries, and interviewing potential managers. There are some sophisticated ones, where you would work on substantive research and portfolio construction. KKR Prisma, Blackstone alternatives, Magnitude, FRM, PAAMCO, come to mind.

 

$200K Total Comp, sorry if that wasn't clear. As I said above, I think my original characterization was inappropriate if the comparison is to PE/HF. I'd had an extra cup of coffee...

Life's is a tale told by an idiot, full of sound and fury, signifying nothing.
 
Best Response

FoF investing is boring/stupid/non-prestigious/whatever negative adjective to everyone who has never done it. I'm yet to meet anyone in the industry who strongly dislikes the work. Keeping up with investing from a macro perspective and analyzing firms/strategies is actually pretty interesting. That being said, you have to be at a good shop. In terms of pay it goes Top FoFs > E&F > FoF > Pensions/Municipalities. So if possible to move up stream in a few years that'd obviously be ideal.

Also idc where you live, 200-300k is really good money. So lol to the guy shitting on you for making "not that much".

 

Thanks for the insight - everything I've heard indicates that the job is actually pretty quantitative due to their approach to portfolio construction (grilled me on my python / matlab etc.) but I was most excited about getting to work more at a macro level (as opposed to IB). Hopefully it works out...

Life's is a tale told by an idiot, full of sound and fury, signifying nothing.
 

I'll take the otherside having done some FOF early on and now working on the buyside as a credit analyst (after a long slog trying to make the switch). Meeting fund managers all day is pretty cool certainly, however, "grilling them thoroughly" isn't a particularly good way to endear oneself even though it's what you need to do to succeed in a FOF seat. Furthermore, while you do make a lot of connections, they only get you so far (an interview potentially) but if you have no transferable skills you will not be getting hired.

Keeping up with strategies from a macro basis also does not equal being able to articulate a coherent macro view or generate trade ideas. I've found many FOF analysts that lack other finance expereicene are pretty good at articulating what their managers think...but struggle if you press them on something "off script"- i.e. something their managers don't cover or write on. The other complicating portion is the most transparency you get is from your long short value managers (where the tried and true path is ib/equity research) while the transparency from macro managers is pretty poor to be honest (for good reason given holding period).

FOF is a great gig for those winding down their careers and looking to clip a coupon while keeping a foot in the door in a relaxed atmosphere. While the perks may be great id caution on staying too long early on as it gets you pigeon joked and transferable skills are few and far between (an analyst of analysts does not equal a securities analyst). It is possible you could make a career of it but I've found that in the long run you really need to be a great marketer to succeed (not unlike anything else but a heavier marketing skew) and you will find the "investment process" frustrating at a lot of places as it just consists of a partner going with his gut. Agreed with others on the negative industry trend but it could let you exit to an endowment which would be solid.

That said with your ib background and potential b school exit you will have options if you want them.

 

Really interesting to hear everyone's thoughts on the industry trend. I didn't realize that was the case. I interned at a FOF in Southern California this summer and they were doing great, albeit it's a pretty innovative firm.

I really enjoyed the work and found that the analysts had great rapport with the managers. Many of them were young guys who I assume are looking to make the jump.

I also thought the macro insight was really cool. The aggregated view of managers was interesting and according to my boss had some predictive power.

 

I think I know which group you're talking about. Some of them invest in other private equity firms, some of them buy out certain investments of PE firms. I guess these guys might be investing in credit hedge funds.

They basically invest in a pool of other funds.

 

the fund of funds charges a 1/10 (or more) and then parks money in hedge funds/pe shops/vcs that then charge 2/20 on the money.

the investors should jsut give their money to me to manage instead -

oldhat capital

 
oldhat:
the fund of funds charges a 1/10 (or more) and then parks money in hedge funds/pe shops/vcs that then charge 2/20 on the money.

the investors should jsut give their money to me to manage instead -

oldhat capital

Fund of funds don't get the 1/10 unless they're actually in the investment. PE shops take 2/20 or more, and the FOF is nothing more than an LP with a fee structure that invests in the primary (PE) fund. I look at FOF as nothing more than a moderately expensive mutual fund - though I've actually seen a number of FOF's that charge less than 1/10.

 

If I'm looking to get into PE, is the data analyst position going to get me the experience and exposure needed to enter into the PE industry?

 

are terrible for their investors. You basically take 5% of returns between the actual HF/PE fee structure and then the FOF's fee structure on top of that. Most are 1/10%, if you allowed 2/20% (and I'm sure there are a few who do charge that, but very few) you are effectively stealing from the investor

 
napoleon:
are terrible for their investors. You basically take 5% of returns between the actual HF/PE fee structure and then the FOF's fee structure on top of that. Most are 1/10%, if you allowed 2/20% (and I'm sure there are a few who do charge that, but very few) you are effectively stealing from the investor

WTF are you talking about? Have you ever heard of volatility or standard deviation? A good FOF has very low annualized standard deviation (2%-3%). It's all about risk adjusted returns. There are also thousands of hedge funds and a lot of them are bad. You need a significant amount of experience in trading/investing to be able to pick hedge funds.

 

hedge fund FOF invest in portfolios of other hedge funds, usually 5-20 different funds. This is done mainly to eliminate idiosyncratic risk. A good 80-95% of idiosyncratic risk is guaranteed to be eliminated using this strategy.

FOFs have much lower standard deviations that most HF strategies. The returns of FOFs over the years have been slightly less than the S&P500 at around 10.5% yearly returns but this is made up for the strong stability of returns compared to the market. The SP500 indicies are much less stable than FOF.

As for the comment about "screwing investors", the fees for FOF are charged twice which reduces returns but this is relative to the low standard deviation. Investors and portfolio managers often use FOFs to diversify and hedge certain elements of their portfolios due to the lack of correlation to certain indicies.

To blindly claim that FOFs are useless and crap due to the fees is idiotic. It's an alternate investment tool that has special uses.

And some of you really don't know what you are talking about...

 

returns over last 3 years are not a good barometer, lets wait 10 years and look at returns. I agree they attempt to diversify idiosyncratic risk, as multistrat HF's supposedly do...Also, they are not sticky money (like pension funds, endowments, etc), thus they have the same problem that HF's have, many leverage to amplify returns building on the lev most HF's they invest in, but it's not long-term capital. This is my opinion, I work at a major HF, doesn't mean I am right necessarily. I just think the fee structure is not worth the supposed lower volatility they claim to offer to their investors and many have been hit hard in the recent dowturn do their own leveraging. In theory they are great and give investors exposure to an asset class they are generally blocked from (HF's/PE), but do to the many related strategies and correlated markets, they don't diversify away the risk they claim and the downside is much greater than I think most investors realize

 

well in FOF you monitor the managers that have funds invested in them. PE fof would be investment in private equity funds.

According to Riemann,

"by riemann (Monkey, 58) on Thu, 2007-08-02 12:14 reply | quote


PE FoFs investment in private equity funds.

How they add value (or at least claim to):

1) Access to top funds (e.g. Sequoia) 2) Professional selection skills 3) Streamline administration. Private equity portfolio administration is a bitch (e.g. lack of standards, etc.)."

I guess this might help!!

 

think of how you would phrase it if you interviewing for banking. ur interviewer said ur already on the buyside why banking?

basically for FoF, u can say something like they didn't take on any full time hires at all, the fund had numerous withdrawals and couldn't bring on people full time. ur still interested in asset management and various manager strategies. and feel that an opportunity working at a FoF would blah blah blah blah blah blah blah.


The world has changed. And we must change with it.

------------ I'm making it up as I go along.
 

Hours are usually a lot less, unless you are actively part of the fundraising process. If you are a research analysts, you need to attend presentations when pms are willing to meet with you. Considering that a fund of funds typically invests in less 10-30 funds, there are a less meetings and research the single strategy funds that try to invets in 50-200 securities.

Since most US funds are concentrated in Greenwich and NY, you better off working for a fund of funds in the area. If not, you will be racking up the frequent flyer miles/

 

Last year, was working on on LP-GP RoundTable (Private Equity Conference - Emerging Markets): Wanna know what could be the best session topics for FoF: Esp PE FoF.. Would it be of any interest to HF FoF.. Gotta work on FundForum..

Xcuse, as i've no answer to Econ..

 

from the gossip i hear here, funds of funds (fofs) are pretty different from working for a fund that invests directly in securities. You'd probably be learning stuff about how to evaluate managers' performance. I think a more conventional way to get into funds is to find one that recruits in undergrad, or start at a mutual fund, or work in an investment bank doing front office stuff (IBanking, S&T, Inv/Asset management). That said, if you're young and driven, you might be able to make almost anything work out for yourself, and starting at a fof is much closer than starting as, say, a journalist (and even then your future is still flexible, a la Steve Rattner).

 

i understand that fof are not driven by the bottom-up strategy as straight up hedge funds, but I'm more concerned about whether they have the same negative stigma as that associated w/ a position in say operations. Don't want to take a position that will pigeonhole me in a particular field that doesn't have any exit opps...

 

Responsibilities: I'm assuming associate = post mba level. Responsibilities would include interacting with the GPs (PE funds) and analysts to create the diligence used by the FoF' investment committee. A FoF will see hundreds and thousands of investment opportunities, and the associate will create materials to help his bosses disseminate between the winners and losers. This would include analyzing past funds, sector outlook, investment strategy, etc...

Co investments: GP's will occasionally look for outside equity when they make an investment, which is where Co-investments come into play. For example, BX might reach out to some of its LPs and give them the chance to participate on a particular investment. Rather than researching a fund, this would require the FoF to analyze the prospective investment.

Career Progression: Probably depends on what the associate is looking for. I don't see why you couldn't transition to a GP. (know that you will be building a different skillset though)

Interview: Probably the same things any other asset manager or bank would want to see. Maybe think about what types of things you would evaluate if given a prospective fund to conduct diligence on.

 

In essence, PE FoF falls under investment management.  As such, you can diversify your portfolio among funds to mitigate certain risks.  Direct PE is entirely different.

With FoF, you're betting on a larger amount of managers.  If you were to take your money and simply invest it in Private Equity Firm X's Fund, all of your chips are with that company.

 

I have a friend who works at a fund of funds and he always tells me that he literally does nothing stimulating at work. mostly due diligence, pitchbooks, and any other presentation temptlates that his boss needs prepared. On the other hand, he has told me that he meets weekly with hedge fund managers or teleconferences with them so the exposure is probably pretty solid. This may be beneficial for someone with IB experience, but I dont see it as a traditional route to geting into the HF/PE world.

 
Buster McGillicudy:
I have a friend who works at a fund of funds and he always tells me that he literally does nothing stimulating at work. mostly due diligence, pitchbooks, and any other presentation temptlates that his boss needs prepared. On the other hand, he has told me that he meets weekly with hedge fund managers or teleconferences with them so the exposure is probably pretty solid. This may be beneficial for someone with IB experience, but I dont see it as a traditional route to geting into the HF/PE world.

Do you know approximately what his comp is ?

 

it seems to me that i've heard a lot of people going from an initial banking stint into funds or various other things, but typically when you go into a fund you're not gonna come back in two years and be able to slide into banking the same way

 

clb, What is the day to day work like in a Hedge FOF ? I'm also currently contemplating an offer from a $2Bn Hedge FOF and need to find out more about the industry.

 

It's mostly due diligence. You'll do initial stuff-- meeting with managers, hear their marketing pitches, etc.-- and then ongoing stuff-- manager calls, get updates on what they think the markets are doing, their largest positions, just basically make sure they're still doing what you hired them to do.

For each individual manager it's pretty easy, but when you start getting lots of managers the work adds up. (For a $2Bn fund you'd have 50 managers even if you had $40million allocated to each.)

As far as hours and stuff, I'm usually in the office 8-5 and it's very relaxed. There's a lot more lag time between decisions and actions (like if you want to redeem from a manager you generally have to wait at LEAST until the end of the quarter) so there's usually not much of a rush to get things done.

In terms of quality of life it beats the hell out of i-banking, I just wonder if it's the best place to start out.

 

No it's not the place to start out unless you plan to stay at a FOF. Unless you're extremely well connected, there's a high probablity that you will be pigeon-holed. Totally different ballgame from all of the other options you mentioned.

I too am currently interning with a FOF and the quality of life seems to be very good. However, it's not hardcore finance either. I for one plan to go a different direction.

 

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