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INTRODUCTION
Funds of funds (FOFs) are mutual funds that hold shares of other mutual funds and have grown significantly in popularity. According to statistics from the Investment Company Institute (ICI), the number of FOFs has more than doubled in size, whereas assets have grown exponentially. In 1999, there were 212 funds with total net assets of US$48 billion; as of the end of 2012, these numbers were 1156 funds and $1282 billion, respectively. Although the popularity of FOFs is unquestionable, very few academic studies are exclusively dedicated to them. To the best of my knowledge, Bertin and Prather (2009) is the only academic paper solely devoted to open-end FOFs. Bertin and Prather (2009) report that FOFs with identified managers outperform FOFs with unidentified managers, and that FOFs that invest in-family outperform FOFs that invest out-of-family and traditional equity mutual funds. 1
Hybrid-FOFs, the subject of this study, is one of the most popular types of FOFs.2 Hybrid-FOFs invest in a combination of stock, bond and money market mutual funds, providing investors with a diversified portfolio at a reasonable price. Although each fund is different, hybrid-FOFs will normally hold between 3 and 20 mutual funds and invest 30-70 per cent of their assets in equity funds, 30-60 per cent in fixed-income funds, and between 0 and 30 per cent in money market funds. 3 The vast majority of hybrid-FOFs are actively managed; this allows their managers to have more investment flexibility than traditional equity mutual funds or other types of FOFs, which enables them to alter their portfolio's configuration in response to the changing market conditions.
Hybrid-FOFs are similar to traditional hybrid funds. They both offer investors a diversified portfolio, which includes exposure to the equity, fixed-income and cash sectors of the market. Fund managers of both types of hybrid funds have a greater degree of investment flexibility in comparison with those of traditional equity or fixed-income funds. This greater degree of investment freedom allows fund managers to actively change their portfolios mix in response to, or in anticipation of, market swings. However, hybrid-FOFs and hybrid funds do significantly differ in the type of assets they hold. Hybrid-FOFs hold shares of other mutual funds, whereas hybrid funds hold individual securities. Also, when hybrid funds...