Despite the $3 billion in hedge funds-of-funds, the investments have not faired well for investors. Investors would have made more money with a Standard & Poor’s 500 stock index fund, according to BusinessWeek. This is partly because investors are saddled with fees of 5% or more each year and the funds also generate high tax bills. A few years ago, investment firms began offering hedge funds-of-funds for those not as wealthy as traditional hedge fund investors and registered them with the Securities and Exchange Commission, a move that allowed the funds to admit an unlimited number of investors and keep investments minimums in the $25,000 to $100,000 range. The money is typically spread out across a dozen or more hedge funds for diversification and to minimize the consequences of a fund blow-up. Another reason performance of hedge funds-of-funds hasn’t turned out to be what it was cracked up to be is that most funds aim for modest gains, regardless of whether stocks rise or fall. The concept is that when stocks head south, such an “all weather” investment preserves capital, leaving a larger portfolio to work with when good times resume. A BusinessWeek analysis of performance data culled from SEC filings reveals that the average SEC-registered hedge fund-of-funds with a minimum of $25,000 to $100,00 and a fiscal year that ends on March 31 returned only 6% a year over the fours years through March 31. On the other hand, the S&P rose an average of 7.2% a year during that period. One thing that could help the funds would be a prolonged and nasty bear market, which would turn the tables on the less than stellar funds by helping them overcome performance deficits.

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