Portfolio construction is often one of the weak points of the typical fund of funds. While they invest enormous amounts of time and effort identifying the right managers, they then fail to combine their chosen funds in an innovative way. Worse still, they tend to have very static portfolios.
A typical portfolio is likely to have a more or less equal weighting of around 20-25 managers spread across the gamut of strategies from long/short equity to convertible bond arbitrage and distressed debt. The number of managers in a portfolio may well increase as funds 'close' to investors.
Rather than selling 'closed' managers or closing their own fund of funds to avoid diluting the top quality 'closed managers' that they have in their portfolio, they often keep on adding funds and the number of managers can start to reach 50.
At the same time, many funds of funds seem to...