Fund of Funds or (FOF) is an investment fund that invests it’s portfolio’s assets into other funds such as, Hedge Funds or Mutual Funds. Often referred to as a Multi-Management Investment, Fund of Funds do not invest directly into stocks, bonds, and other securities. Instead they invest in a portfolio of funds that do.
A Fund of Funds could be Fettered or Unfettered.
If a FOF only invests in portfolios managed by one company it is fettered. If it invests in external funds managed by other managers from other companies it is unfettered.
Example of Fund of Funds
For example, an investor might want to invest in 6 different funds but might not have the capital to invest in each of them separately. This problem can be solved via investment in Fund of funds, where small investment provides an exposure to multiple mutual funds or hedge funds.
Fund of Funds fee Structure
Investors in a FOF pay both the fees charged by the FOF, typically 1.5% and 10% in management and incentive fees, respectively, and the fees charged by the underlying hedge funds or mutual funds, often 1.5% and 20%.
The Benefits of Fund of Funds
The benefits of FOFs are that they provide the investor with professional financial management. FOFs also allow small investors to benefit from a diversified portfolio with minimal investment. FOFs managers are required to maintain certain credentials within the securities industry. These rules are in place to protect investors.
Types of Fund of Funds in the U.S.
Fund of Hedge Funds: a FOF that invests it’s assets only in a portfolio of hedge funds
Fund of Mutual Funds: a FOF that invest it’s assets only in a portfolio of mutual funds
Fund of Private Equity Funds: a FOF that invest it’s assets only in a portfolio of private equity funds
Fund of Venture Capital Funds: a FOF that invest it’s assets only in a portfolio of venture capital funds