I thought I was tough on hedge funds-of-funds in my column last week. My views were mild compared with David Swensen, chief investment officer of the Yale Endowment Fund. He regards them as “a cancer on the institutional investment world”.

Here is the full quote from an interview in the Wall Street Journal this morning:

“Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can’t make an intelligent decision about picking managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds? There’s also more fees on top of existing fees. And the best managers don’t want fund-of-fund money because it is unreliable. You need to be in the top 10 per cent of hedge funds to succeed. In a fund of funds, you will likely be excluded from the best managers. [Bernard] Madoff also relied enormously on these intermediaries. He wouldn’t have had nearly as much resources were it not for fund of funds.

Consultants make money by giving advice to as many people as possible. But you outperform by finding inefficiencies most of the market has not yet uncovered. So consultants ultimately end up doing a disservice to investors.”

It should be noted that Mr Swensen is not merely an interested bystander, but one of the most influential hedge fund investors in the world, even if Yale’s endowment has suffered along with others in the past year - it recently disclosed that it had lost 25 per cent of its value since last June.

January 13, 2009 5:12pm in Finance | Comment