There’s this question that I’m confused about:
There is an investor investing in a fund of funds, but is concerned with the risks associated with such investing. Which of the following benefit and drawback in combination, about fund of funds investing, when compared to investing in individual hedge funds is most accurate?
*** I chose the one with the following benefit and drawback:
Benefit of Fund of Funds
May grant investors access to highly sought-after closed funds.
Drawback of Fund of Funds
Returns are most likely going to be spent on additional management fees.
Aren’t these two statements correct? The Qbank marked this as wrong and put another answer as correct. I just need to know why the statement above is wrong because both seem correct to me. Thanks.
The following benefits and drawbacks were listed as correct:
Benefits
Enable investors with limited capital to invest in a portfolio of hedge funds.
Drawback
On a risk-adjusted basis, net-of-fees performance may be lower than that of individual funds.
Copy and paste the whole question. There might be a ‘better’ answer
Hmm… they both look correct to me, too.
Their answer is more precise.
The second drawback…
On a risk-adjusted basis, net-of-fees performance may be lower than that of individual funds
…is clearly the ‘best’ answer. That’s the main point you need to take away with FoF - the double fee structure.
i think the other benefit is also better choice
Enable investors with limited capital to invest in a portfolio of hedge funds.
is better than
May grant investors access to highly sought-after closed funds.
it may or may not…some hedge funds can be closed to additional investments no matter if it’s FoF or individuals
But I like the first drawback better
Returns are most likely going to be spent on additional management fees.
is better than
On a risk-adjusted basis, net-of-fees performance may be lower than that of individual funds
FoF provides diversification, reducing risk…so you can earn higher risk adjusted return with FoF.