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Most Funds of Funds Don't Add Value: Morgan Creek CEO

The majority of multi-management funds, known as funds of funds, are not adding "much value to justify the fees," Mark Yusko, president of Morgan Creek Capital Management, told CNBC Thursday.

Mutual Funds
Jay Brousseau | Stone | Getty Images
Mutual Funds

Fund of funds refer to a mutual fund that invests in other mutual funds where money is able to be moved between the best funds in the industry.

This strategy has the potential to increase shareholders' returns due to diversification prospects. But it's often criticized as adding another layer of management expenses on shareholders.

"You should pay for active management," said Yusko, whose $10 billion investment firm allocates capital to hedge funds. "But of the 2,500 [funds of funds] out there probably 90 percent aren't really adding as much value to justify the fees. I hope that we try to manage and earn that fee."

There is a life cycle in every industry, he went on to say. Once people who manage assets get what he called the "red Ferrari syndrome" — people who are now very successful but have gotten distracted — his company will likely not invest with them anymore.

He also won't invest with a company if it changes any of its people, processes or philosophy. "Performance is what most people hire or fire on, it's a symptom. If you're coughing you're already sick. You should've avoided getting sick," he concluded.

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