Schweser_Self-Test_Alternative Investments Portfolio Management_Q3

The answer for Q3 states that “The issue with benchmarks is probably more trobuling for individual funds than for funds-of-funds.”

Why it is easier to constrct a benchmark for Fofs than individual hedge funds?

My first thought is that a fund of funds has less idiosyncratic risk than individual funds have.

i’ll add:

Because FOFs have:

  • Better liquidity

  • Informational advantage

  • Economies of scale ( such as manager selection and due diligence)

  • Lower minimum investment

  • Greater diversification ( and as S2000 mentioned, hence less idiosyncratic risk)