Fund of Funds

Funds of funds are used in many areas, including mutual funds, hedge funds, private equity and venture capital. They give investors exposure to several managers and strategies through a single investment.

For example, a private equity fund of funds might invest in fifteen different private equity funds, spreading the investor’s money across many managers, strategies, regions and years.

Funds of funds offer several advantages: diversification across many funds; access to top managers that may be closed to smaller investors or have high minimum investments; and professional selection and monitoring of managers, which can be especially valuable in complex areas such as private equity and hedge funds.

The main disadvantage is cost. Investors pay two layers of fees: the fees of the underlying funds and the fees of the fund of funds. This can significantly reduce returns. Funds of funds can also become so diversified that their returns resemble the overall market. Their popularity has declined in some areas, as large investors build their own in-house teams to select managers directly, but they remain useful for smaller investors and specialised strategies.