Funds of funds are under fire. Paid generous fees for picking hedge funds for their investors, their role has been questioned lately in the wake of the Bayou scandal. American International Group's ( AIG) Hedge Fund Strategies Group, a $7 billion fund of funds, belongs to the big guns category, serving a handful of large institutional clients. Amid AIG's accounting issues, Robert Discolo, who heads this fund of funds group, is relatively sanguine on hedge funds, Asia and the future of the industry. Discolo took the time to discuss the outlook for the industry and his strategy in an interview with TheStreet.com. TheStreet.com:Hedge funds have not performed so well this year. What's your outlook on the industry?Robert Discolo: We realize that performance has gone down when looking back at some years when returns were averaging in the high teens. There is a lot more money in hedge funds now. But I am generally optimistic. Hedge funds bring together the most talented people in the world. Hedge funds are a talent pool, not an asset class. The key factor both for hedge funds and funds of funds is to have the right people. TSC:Some are attacking the business model of funds of hedge funds. Are the fees justified?RD: Fees are justified when you pick the right funds and put them together the right way. There are approximately 8,000 to 9,000 funds to choose from. Funds of funds also deliver capacity access to a fund closed to new investors . In 2000, we invested in a new long/short hedge fund. We had been working with this manager for a number of years. In 2002, he had a bad year and half of his clients redeemed. But we knew he had made money for his former firms before, we had a long-term relationship with him and we stayed. In the following years, he was up 60%, 30%. Last year, he had a couple of redemptions and he offered us the capacity: 100% to AIG. "You were in first; you know me and you were loyal to me," he told us. That's how you get capacity.