Hedge funds: Funds of funds will survive Madoff

Hedge funds have faced a lot of criticism over the past year – as many have struggled to cope with the global financial crisis and faced heavy redemptions. A clear majority have delivered negative returns. As I have argued here before, though, not all of this criticism has been deserved. Hedge funds should not be blamed for the onset of the credit crunch; a significant minority have continued to deliver positive returns; and the industry as a whole has still outperformed other risk assets such as equities and real estate/property. But we all know it has been a very difficult time and that conditions continue to be very challenging.

The part of the industry that has had arguably the most opprobrium heaped upon it during this tumultuous period has been the fund of funds sector. While the mean returns from the single-manager universe...