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Fund of Funds Performance

by Bronwyn Williams

  • 18 Sep 2009
  • PE

Funds of funds are typically viewed as a low-risk investment; considering the difference between the IRRs of individual funds of funds and their respective median benchmarks provides a proxy for the level of risk involved with this fund type. More than half of all funds of funds have IRRs within +/- 5% of their median benchmarks, while the wider interval of -10% to 9.9% encompasses 77% of all funds. Outside of this interval, 13% of all funds outperform the median benchmark by 10% or more, whereas 10% underperform the median benchmark by more than 10%. The high concentration of funds clustered around their benchmarks and the relatively few outliers indicates that investing in fund of funds vehicles is a relatively low-risk strategy. IRRs for fund of funds are generally robust, with the median IRR for each vintage generally between 5% and 10%, except for recent vintages, for which it is too early to read too much into performance. However, the financial crisis will undoubtedly have had an effect and vintages 2005 and 2006 are posting median IRRs of -3% and -9% respectively.

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