Managers often complain that consultants and institutional investors are willing to look only at larger well-known names when investing in hedge funds. And funds of funds argue they can deliver more specialized niche strategies to clients. “To some extent, I plead quasiguilty to that,” says Stephen Nesbitt, founder and chief executive of consulting firm Cliffwater. But he hasn’t been impressed with the performance of some specialty funds of funds. “The volatility seems high and the returns seem low,” Nesbitt says. He also contends that investing with larger well-known managers makes more sense for pension fiduciaries, which represent the majority of Cliffwater’s clients. “These are people who are entrusted with other people’s money and pensions, so I do think we feel very comfortable giving a little more weight to the longevity of [the managers’] track record,” Nesbitt says. “If I were building a portfolio for some of my rich Hollywood friends,...