CFA Level I · CFA Level I Exam · Hedge Funds
A fund of funds charges a 1% management fee and a 10% incentive fee on net returns, and invests in underlying hedge funds that each charge 2% and 20%. Relative to investing directly in a single hedge fund, the investor in the fund of funds most likely experiences:
The fund of funds investor most likely bears a double layer of fees but gains diversification and manager selection and due diligence. Underlying funds charge their own fees, and the fund of funds adds another, with incentive fees not netted across funds.
- Alower diversification but lower total fees
- Ba double layer of fees but gains diversification and manager due diligenceCorrect
- Cthe same fee burden because incentive fees are netted across funds
Explanation
Fund of funds investors pay fees at both levels. Incentive fees are charged on each underlying fund's gains even if others lose, so fees are not netted. In return they get diversification and due diligence.
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