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After a miserable 2008, the last thing FOF’s needed was David Swenson, CIO of the Yale endowment, one of the most respected endowment chiefs referring to them as,  “Fund of funds are a cancer on the institutional-investor world. they facilitate the flow of ignorant capital.”

After poor performance and the miserable Mr. Madoff, Swenson’s comments had the appearance of “piling on.”


I have been waiting for the industry response and today it finally came.


A recent article on Advisors Perspectives seeks to refute Swenson’s comments.


We believe Swensen’s arguments are misplaced.  The data show hedge funds of funds performed extremely well during the challenging environment of 2008:



2008 Return

2008 Std Dev (1)

S&P 500



MSCI World



HFRI Fund of Funds: Composite Index (2)



HFRI Fund of Funds: Diversified Index (3)







Those investors Swensen characterizes as ignorant not only significantly outperformed broad-based indices in 2008, they also outperformed Yale’s endowment.  Moreover, much of Yale’s money is invested in private equity deals that are infamously priced (marked) in a very generous manner. Many suspect Yale is down 30-35%, not the 25% Swensen suggests.


In the same post, Advisor Perspectives offers comments from FOF manager Kenneth Phillips from RCG Capital Partners.


Mr. Swenson’s sheltered and hubris views are, more appropriately, a “cancer on the institutional – investor world.” That Yale has elected to internally develop a large and expensive investment team, rather than retain outside advisors, is testimony to the many complex issues facing investors. Rather than pay a fee to an independent, experienced, and objective consultant, Mr. Swenson has taken those same monies and formed his own proprietary team, saving little in the long run and potentially compromising his objectivity as a Fiduciary. Although this financial option may be available to the largest institutions, it is not available to everyone; suggesting that all other investors be banished to the world of passive investing is naïve and foolish. Shame on Mr. Swenson for bullying and maligning investment consultants, an industry that for more than forty years has placed the interests of investors before its own. Hopefully the future performance of the Yale Endowment will allow Mr. Swenson to differentiate his returns from those of the masses – during 2008, a great test of skill, the average fund-of-hedge-funds, with the burden of their fees and purportedly less brilliant management, has meaningfully beaten his bogey.


Kenneth S. Phillips
RCG Capital Partners, LLC
One Boulder Plaza
1301 Canyon Blvd.
Boulder, Colorado 80302



HC note: I have always refuted the idea that FOFs are “dead” or “not worth the fees” etc. I have worked for government and know that very few public plans  – the marginal investor in alternatives – will have the time, $$ or inclination to build a professional investment team. They are content to use outside expertise. This will never change.  When money comes back into the space, it will go to FOFs first.


David Swensen Speaks Out: 
Are Hedge Funds of Funds a Cancer?
Robert Huebscher
January 20, 2009

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