Chapter 6) is an assigned reading in the FRM curriculum, but does not. have any corresponding AIM statements. The AIM statements listed in the study guide for this reading relate to the next topic (Jaffer, Chapter 17). As a result, we have created learning objectives so you can focus your attention on the main concepts from this fund of hedge funds reading.

81.1: Discuss the general structure and objective of a fund of hedge funds.

A fund of hedge funds combines individual hedge funds with the intent to stabilize returns. The fund of funds concept is attractive because it spreads investments across various investment style managers allowing investors to gain exposure to each manager's unique strategies. Therefore, a major objective of the fund of funds investor is optimal diversification.

Other objectives include:

• Establish and maintain strong relationships with a set of superior managers of individual hedge funds.

• Form a portfolio management team to evaluate hedge fund managers' strategies and performance.

• Understand the effects of different market conditions on the performance of the portfolio.

• Perform due diligence by evaluating strategies and risks undertaken by the individual fund managers.

• Establish administrative support to monitor risk, style drift, regulatory compliance, and to identify and resolve operational problems.

• Effectively combine funds to provide superior returns and low risk versus traditional asset classes.

• Provide transparency in reporting of all risks and timely disclosures,

• Maintain proper ethical behavior in the treatment of investors.

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