Definition
Fund of funds provide diversification across multiple fund managers, strategies, or asset classes through a single investment. Common in hedge funds and private equity, FoFs offer access to managers with high minimums, due diligence expertise, and portfolio construction. The drawback is an additional layer of fees ("double fee" structure) on top of underlying fund fees.
lightbulb Example
A hedge fund FoF allocates to 15 underlying hedge funds across strategies: 30% long/short equity, 25% macro, 20% event-driven, 15% fixed income, 10% quantitative. The FoF charges 1% + 10% on top of underlying funds' 2% + 20%.
verified_user Key Points
- Invests in other funds, not directly in securities
- Provides manager diversification and access
- Double fee layer increases total costs
- Common in hedge funds and private equity