| Index | March 2004 | QTD | YTD | Description |
| S&P 500 Index* | -1.64% | 1.29% | 1.29% | Large-cap stocks |
| DJIA* | -2.14% | -0.92% | -0.92% | Large-cap stocks |
| Nasdaq Comp.* | -1.75% | -0.46% | -0.46% | Large-cap tech stocks |
| Russell 1000 Growth | -1.73% | 0.91% | 0.91% | Large-cap growth stocks |
| Russell 1000 Value | -0.98% | 2.92% | 2.92% | Large-cap value stocks |
| Russell 2000 Growth | 0.46% | 5.58% | 5.58% | Small-cap growth stocks |
| Russell 2000 Value | 1.07% | 6.59% | 6.59% | Small-cap value stocks |
| MSCI EAFE | 0.60% | 4.41% | 4.41% | Europe, Australasia & Far East Index |
| Lehman Aggregate | 0.75% | 2.66% | 2.66% | U.S. Government Bonds |
| Lehman High Yield | 0.68% | 2.34% | 2.34% | High-yield corporate bonds |
| Carr CTA Index** | -1.50% | 3.48% | 3.48% | Managed futures |
| 3-month Treasury Bill | . | . | 0.23% | |
| Estimates as of March 31, 2004. *Return numbers do not include dividends. **Return numbers updated through March 29, 2004. |
A hedge fund of funds (FoF) is simply that–a fund that invests in hedge funds. Such funds' potential to diversify portfolios of traditional holdings, and their relatively smooth return streams, has made them the darling of asset allocators. Investors of all stripes have swarmed to FoFs in recent years. In fact, most knowledgeable observers believe that nearly 60% of all inflows into alternative investments end up in these vehicles.
But behind this seemingly low-risk method of diversification may lurk a beast with much more potential downside than anyone realizes. Consider a recent study by the Edhec Risk and Asset Management Research Centre, which is part of France's Edhec Business School. According to "Fund of Hedge Fund Reporting: A Returns-Based Approach to Fund of Hedge Fund Reporting," many funds of funds are not giving investors the information they need to quantify the risks taken in achieving their returns.
Consider, for example, the known tendency for hedge funds to invest in illiquid securities. When there is no market price available for these positions, some funds use the leeway in pricing to smooth out their returns, which may result in reported performance that appears much less risky than it actually is. The Edhec study therefore recommends that FoFs determine if such manager "sandbagging" is markedly affecting their returns.
Another of Edhec's recommendations is for FoFs to provide investors with exposure information on the principal risk factors of the fund. This could take a number of forms; Edhec recommends that funds disclose the year-to-date return for each strategy and each fund in which the FoF invests, along with performance comparisons of the FoF to traditional indices, fund of fund indices, and the risk-free rate.
