Fund of Funds (FoF)
A fund of funds (FoF) invests in a portfolio of other funds, offering diversification, professional management, and access to exclusive strategies.
What Is a Fund of Funds (FoF)?
A fund of funds (FoF) is an investment vehicle that pools capital to invest in a portfolio of other funds, rather than directly buying stocks, bonds, or private assets. This structure provides investors with broad diversification across managers, asset classes, and strategies, and is commonly used in hedge funds, private equity, and mutual funds.
How Does a Fund of Funds Work?
FoFs collect money from investors and allocate it to a range of underlying funds, such as hedge funds, private equity funds, or mutual funds. The FoF manager conducts due diligence, selects the underlying funds based on performance, strategy, and risk profile, and continuously monitors them. This approach allows investors to access top-performing or exclusive funds that might otherwise have high minimums or strict entry requirements.
Why Invest in a Fund of Funds?
Diversification: Reduces risk by spreading capital across multiple funds, sectors, and strategies.
Professional management: Experienced managers handle fund selection, due diligence, and ongoing monitoring.
Access: Opens doors to premium or restricted funds and strategies not available to most individual investors.
Operational efficiency: Streamlines capital calls, reporting, and administration for investors.
Example: Fund of Funds in Practice
A private equity FoF might invest in 20–30 different private equity funds across buyout, venture, and growth strategies. This gives investors exposure to a wide range of managers, sectors, and geographies, smoothing returns and reducing the impact of any single fund’s underperformance.
Key Considerations
Double fees: Investors pay both the FoF’s management/performance fees and those of the underlying funds, which can reduce net returns.
Liquidity: Many FoFs, especially in private equity, require long-term commitments and may have limited redemption options.
Due diligence: Success depends on the FoF manager’s ability to select and monitor high-quality funds.
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