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
At the same time, many funds of funds seem to...