“Applying the FD procedure to the first model, we find that, after fees, the majority of FoHFs do not channel alpha from single-manager hedge funds. Applying the FD procedure to the second model, we find that only a very small fraction of FoHFs deliver after-fees alpha per se, i.e. on top of the alpha of the hedge fund indices. “
FOFs face a huge hurdle because of the high fees. HF Indexes face a huge hurdle because of how they are structured. If anyone ever tries to sell you something that is the “beta” of hedge funds, run away as fast as you can. You don’t want exposure to hedge fund beta (it’s the alpha you want) nor do you want exposure to broad hedge fund indexes (although some replication can make sense, depending). Lots and lots of articles in the archives and a nice post here from Bridgewater’s Daily Observations “Hedge Fund Returns Continue to be Dominated by Beta“.