Funds of Funds Could Face Reckoning on Fees

In addition, hedge funds are becoming increasingly less liquid, forcing investors to keep their money in for a longer period of time. As a result, funds of funds have fewer choices if liquidity is a consideration. According to the Wall Street Journal, many big hedge funds, including Kingdom Capital Management, Citadel Investment Group and Eton Park, are in the process of imposing or have instituted longer lock-up terms, a ploy to avoid registration with the Securities and Exchange Commission.

While funds of funds are still the favorite way for institutions to consider a foray into hedge funds, as investors evolve and become more sophisticated, expenses will become a bigger issue. As other areas of Wall Street have shown, middlemen receiving big commissions for a service that can be readily duplicated rarely last forever.