Charles Gradante created a wonderful piece of self-serving fiction in his July 22 "Other Views" commentary about the "dangers" to ERISA plan fiduciaries of investing in hedge funds of funds.
First let's examine why Mr. Gradante might want to discourage pension plans from using funds of funds to facilitate their investments. Mr. Gradante is in the business of managing hedge fund portfolios for wealthy individuals, institutions and pension plans. If plans invest through funds of funds, they don't need Mr. Gradante. In fact, the growing popularity of funds of funds is fast democratizing the world of hedge funds, cutting into Mr. Gradante's treasure trove of once-secret information.
Second, let's consider Mr. Gradante's accusations about hedge funds of funds: that their opaque nature does not allow pension fiduciaries to sufficiently fulfill their duties. The principal assertion that funds of funds are opaque is only true of a small portion of all such funds. Most will happily provide a list of their underlying hedge funds to pension fiduciaries on demand. As for the funds that will not, it is the responsibility of pension fiduciaries to ensure they only invest with transparent funds of funds.
Finally, hedge funds of funds are the only means by which the vast majority of pension plans can access hedged strategies. A plan with $10 million to $100 million net assets and a prudent 10% allocation to hedge fund(s) can, at best, directly invest in two to five funds. However, prudence requires this money be diversified across somewhat more hedge funds.
Benjamin W. Shoval
Shoval Consistent Performance Funds