How To Invest In Hedge Funds (When You Don't Understand Them)

Quite often, our readers ask how to invest in hedge funds: “I don’t know the first thing about them. Other than Warren Buffett, who’s good? Are the fees worth it?”

Looking for an answer to such a common query, Benzinga reached out to Don Steinbrugge, one of the top experts in the hedge fund industry. After roughly two decades working in the space, at Merrill Lynch Investment Managers — now part of BlackRock, Inc. BLK — and Andor Capital, among others, Steinbrugge founded Agecroft Partners, a global, award-winning hedge fund consulting and marketing firm that he has been running for almost 10 years now.

Let Someone Else Choose

“For most people that don't understand hedge funds, a good way to invest in hedge funds is through what is called a fund of funds,” the expert declared. “It's basically a manager that invests in hedge funds; so, they might own 10 different hedge funds in their fund— and then investors will invest in their funds.”

“So, if you only have $500,000 to invest or $1 million to invest— If you invest in a fund of funds, you can diversify across a broad portfolio, and someone else does all the hard work of picking the managers for you,” he continued.

The ‘Double-Fees Issue’

“The fund of funds industry has gotten a lot of criticism because they charge a double layer of fees: you have to pay the fee of the hedge fund, and then you have to pay the fee of the fund of funds manager,” Steinbrugge explained.

“However,” he went on, “what is happening now is that, because these hedge funds are negotiating fees or have sliding fees schedules, these funds of funds [that] can allocate a lot of money are getting into the hedge funds at a much lower expense level than what an individual would get on its own.”

“So, now if you invest in a fund of funds, the fact that they are saving so much money on fees from their underlying hedge funds more than offsets the fees they charge,” he concluded. “So, we [at Agecroft] think that the demand for certain funds of funds will go up because of that.”

Liked this article? Now check out Steinbrugge’s explanation on how hedge fund strategies are shifting toward those with lower correlations and increased volatility.