I've got some general questions about 'Funds of Funds'
Forgive me, but I'm a newbie to finance. I graduated last year with a humanities degree and I'm taking some time off right now to think about grad school/career options (while working a non-finance job on the side). I've done a lot of research online, and I've read some vault career guides (hedge funds, private equity, venture capital, investment banking, investment management, management consulting, etc.), so I'm starting to feel like I have at least a basic understanding of the financial sector as a whole.....and there's something that's striking me as odd - 'Funds of Funds'.
Let me get this straight - Hedge Funds and Private Equity Firms hire the brightest and hardest working people on the planet. These people then spend almost 100 hours a week looking over thousands and thousands of businesses/properties in search of value. These people then identify great ideas, and need to raise money to invest in those ideas - this is where funds of funds come into play.
Now, Funds of Funds. The people at these firms. Instead of looking at thousands and thousands of businesses/properties for value, all these people need to do is look at the top 10 or so private equity funds, and then pick the top 5 or so to invest their clients' money in!? Excuse me for sounding like an asshole here...but that sounds like an incredibly easy way to make a ton of money (and even a safer way, with the diversication of 5 or so different top funds).
I feel like I (a recent humanities graduate) could run a fund of fund successfully right now. If someone gave me a billion dollars, I could look up the top 5 performing private equity funds of 2010, give each 200 million, and then collect on the 20% gains (200 million) in 5 or so years.
I mean, I guess I just don't really get it!? It seems like such an incredibly easy way to make a ton of money!? What are the drawbacks!? Is it hard to raise money for a fund of fund? - it still seems much more profitable, and almost as secure, as the common mutual fund. Is it hard to make much in the way of management fee's? - I'm sure you wouldn't make as much as someone at a HF or PE firm...but for the amount of work you need to do - next to nothing - it seems like you'd still be getting a real nice slice of the pie.
Hopefully there are some people here with knowledge of funds of funds, or maybe even some people working for them. I'd like to learn as much as possible about them. Who are some of the top players? What do they look for in employees? How much do their employees make in comparision to other top financial professionals? Does anyone know of any good links or books where I could better educate myself?
Thank you in advance for any help!
"Now, Funds of Funds. The
"Now, Funds of Funds. The people at these firms. Instead of looking at thousands and thousands of businesses/properties for value, all these people need to do is look at the top 10 or so private equity funds, and then pick the top 5 or so to invest their clients' money in!? Excuse me for sounding like an asshole here...but that sounds like an incredibly easy way to make a ton of money (and even a safer way, with the diversication of 5 or so different top funds). "
past performance is by no way an absolute indicator for future performance. ..
Furthermore if you look at the sheer size of the assets of the top players (e.g. alpinvest) you realize they cant just split the pot and give it to five funds. Especially if those five funds run the same risk. At a FoF, from my understanding, they will monitor the strategy chosen against what was agreed to. They will run their own risk models (which obviously are different as they are a portfolio of funds). Moreover people will analyse assumptions, projections etc. of the direct investment people. All in all you try to find the best split between funds to invest in according to your own assumptions and then actively "manage & monitor" this investment. At the end of the day, you just add a second fee layer for lazy people.
Thats at least my understanding.
OP - fund of funds also serve
OP - fund of funds also serve as a vehicle for investors that cannot directly invest money into certain GPs. Because they may not have the access/relationship with those GPs.
You're essentially paying people to do the due diligence and work for you, and for the diversification of investing in X number of funds. You may have only a limited $XX million of dollars to play with. You can't split that limited XX million across 20 of the top funds.
For example - you are an small-ish institutional investor who want to diversify your PE portfolio between Blackstone, KKR, Silverlake, and then some smaller players like Kelso, and you only have $50 mm let's say. Can you go to KKR and say 'I want to invest $5 to $10 mm with you in your next fund? No - you can't. That's too small a portion, and you may have to compete against other more prominent LPs that have strong long-term relationships with KKR already. Or perhaps, a better example is top-notch VC funds like Sequoia Capital or HF funds like some of the tiger-cubs. They may limit the size of their funds, and have a long line-up of interested investors. Unless you are a very important LP or have access to them, you won't be able to invest w/ them.
So FoFs that have strong access due to relationships, can allow more 'regular joe LPs' to have some exposure to the top notch GPs - for additional FoF fees.