There are estimated to be thousands of hedge fund managers, all offering a diverse range of complex products in a constantly evolving industry.

There is no single database for investors to make straightforward comparisons between individual funds. To complicate matters, many single hedge funds and funds of hedge funds are unregistered and are restricted from advertising and investors or their investment advisor must have a prior business relationship with the hedge fund before they can invest.

Therefore, information on them may be difficult to obtain. These may represent major hurdles before an eligible investor even has the opportunity to assess and select good single hedge funds.

Investing in a single hedge fund can impose higher risks

Hedge funds have many specific risks including strategy, company and operational risks. In the same way that investing in a single stock is risky from a performance and diversification perspective, the same applies to hedge funds. Consequently, it is important to diversify across many hedge funds.

Most single hedge funds have high minimum entrance levels and limited investor slots

Single hedge funds tend to be unregistered and typically have high investment minimums of at least $250,000, while some do not accept capital from new investors.

Additionally, unregistered hedge funds typically have limited slots available for investors and these slots are normally reserved for investors who can invest substantial amounts of capital.

Furthermore, individuals who wish to access single unregistered hedge funds may have to meet higher minimum investor qualifications. Registered single hedge funds can have lower minimums but thorough due diligence of many managers by individual investors is difficult.

Many investors choose to invest via funds of hedge funds rather than a single hedge fund

In summary, it is extremely difficult for investors to gain access to hedge funds and build diversified hedge fund portfolios. This leads many investors to consider investing in a fund of hedge funds product to both obtain access to the asset class conveniently and to spread the risk across hedge fund managers efficiently.

It should be noted that investing via a fund of hedge funds adds an additional layer of fees and expenses that would not be applicable to a single hedge fund. These additional fees and expenses compensate the fund of funds manager for the value they provide in conducting initial and ongoing due diligence on the hedge fund managers and strategies and managing them as a diversified portfolio.