| F Cube 101 |
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| 04/06/2006 | |
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Alessandro Mauceri, Senior Analyst at Capital Management Advisors S.A. Geneva, answers this week's 101 on the "F Cube" strategy. 1-Could you please describe what is an "F Cube"? What are the main features of this strategy? An "F Cube" is a product having different funds of hedge funds (FOF) as underlying investments. Each FOF has his own risk profile and today it is common to find thematic FOF such as European Long Short, Macro and Event Driven. Lately we also saw the emergence of geographical FOF with balanced portfolios across strategies but with exclusive exposures to Asia, Europe or the US. Additionally some of the newer strategies require more specialised selection skills which sometimes are difficult to find in one FOF company. The aim of an F Cube is to select FOFs with different risk profiles and to create one product which could be similar to an Index. An average fund of funds has more than 20 underlying hedge funds, while an F Cube will have close to 100 hedge funds, effectively giving similar exposure to some of the hedge fund indices. 2-What are the main drawbacks of this type of strategy? The main drawback is the additional layer of fees. Hedge funds usually charge a 2% management fee and 20% performance fee; fund of funds usually charge a 1-1.5% management fee and 10% performance fee. If you add another fee at the F Cube level, the final investors would need a minimum return of 4% from the underlying hedge fund portfolio before they begin to achieve a positive return. In general such F Cube structures are developed within existing FOF operations where they base the F Cube on existing in-house FOFs with different risk return profiles and only add an extra administration fee in the range of 0.20%. These structures are the most cost efficient and transparent in the market. In the case of F Cube funds where the manager invests in external FOF's, the investor should ensure that the F Cube manager negotiates substantial fee rebates from the underlying funds of funds. 3-What kind of investors is likely to be interested in this type of strategy? F Cube can be ideal for private and institutional investors who aim to make their first investment in the space and do not have the expertise to select fund of hedge funds. It is also perfect for investors who want to have an exposure to a maximum of strategies with a big diversification in order to diminish the risk linked to hedge funds investments. It is also important to note than a typical F Cube can usually offer better liquidity terms than the average underlying hedge funds. As such, usually F Cubes have monthly liquidity while many hedge fund managers have quarterly and even yearly liquidity. Depending how the underlying funds of funds are managed, it is often possible to have access to hedge funds with lock up, which in certain case is impossible for investors due to compliance and liquidity issue. Some F Cubes are also managed with a dynamic asset allocation and in certain cases, the manager will overweight/ underweight specific strategies during a period. This is also an advantage for investors who do not have the knowledge or ability to rebalance their funds of funds portfolio. |
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Articles of the same Serie : 101 |
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