What it is
A fund of funds is a fund whose holdings are interests in other funds. Rather than selecting stocks, loans, real estate or private companies itself, the fund of funds manager selects other fund managers and allocates capital among them. Investors in the fund of funds therefore hold one interest that is connected to several underlying funds.
The fund of funds structure usually has two layers. The top layer is the fund of funds itself, run by its own manager. The bottom layer is the set of underlying funds, each run by a separate manager with its own strategy, terms and costs. This is why the approach is often called multi-manager investing. Some vehicles focus on one area, such as a private equity fund of funds, while others spread across several strategies.
Some fund of funds vehicles also focus on secondary funds, which buy existing interests in funds or portfolios from earlier investors instead of making brand-new commitments. Secondary funds explained simply: they deal with interests that already exist, which can change how the timing and structure of the investment works. Every structure carries its own risks, and private fund investments can lose all of their value.
How it’s traditionally been approached
Traditionally, investors who wanted exposure to several private managers had two main paths. They could build their own portfolio by committing to multiple funds directly, or they could use a fund of funds to have one manager handle selection, paperwork and ongoing monitoring. Neither path is right for everyone.
The fund of funds vs direct fund investment question often comes down to access, effort and cost. Direct investing can mean more control and a single layer of fund-level fees, but it also means doing the research, handling many subscription documents and tracking multiple reports and K-1s. A fund of funds can consolidate that work, but fees are typically charged at both the top and underlying levels.
Fund of funds fees are often described as layered. The fund of funds manager may charge its own management or performance-based fees, and the underlying funds charge theirs as well. Investors have traditionally reviewed the offering documents closely to understand how those layers combine. Past performance does not guarantee future results, and tax treatment depends on individual circumstances.
How the right fund manager may help
The right fund manager may help you understand how a particular structure works, what its underlying strategy is and how it fits with your broader situation. A first conversation is generally educational: the manager may describe their approach, how they choose underlying managers and how investors typically receive information. Nothing about a conversation is a promise of any outcome.
Useful questions include: How many layers of fees are there, and where are they all described? How are underlying managers selected and monitored? How long is capital typically committed, and what are the limits on redemptions or transfers? How are conflicts of interest handled, and what reporting and tax documents should I expect?
Also ask how the offering is made. Any private fund is offered only by the issuer through its own offering documents, and you should confirm whether you meet the requirements to participate. Review everything with your own licensed investment, legal and tax advisers before making any decision.
The bigger picture
Money decisions can affect sleep, relationships and daily stress. A structure with several layers, long time horizons and limited liquidity may feel reassuring to one person and uncomfortable to another. It can help to consider how much of your wellbeing depends on having money available, and how you would feel if an investment lost value over a long period.
Taking your time is part of a healthy process. Writing down your questions, involving trusted advisers and talking openly with family can reduce pressure. If you are a health or wellness professional managing both a practice and personal finances, Providers.plus may be a useful resource for the practice side while you separately seek financial guidance.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- Past performance does not guarantee future results, and nothing here is a recommendation or ranking of any investment or manager.
- Many private funds are limited to accredited investors under SEC Rule 501(a), and Rule 506(b) offerings prohibit general solicitation while Rule 506(c) offerings allow it, require all purchasers to be accredited and require the issuer to take reasonable steps to verify.
- The Hastings Fund is an independent educational directory, not a broker-dealer, funding portal or investment adviser; consult your own licensed advisers on investment, legal and tax matters.
Guides in this topic
Fund manager types
Frequently asked questions
What is a fund of funds?
A fund of funds is a pooled fund that invests in other funds rather than directly in individual securities or assets. The manager chooses and allocates among underlying fund managers. Like any private fund investment, it is speculative and illiquid and can lose all of its value.
How does a fund of funds structure work?
A fund of funds structure typically has two layers: the top-level fund and the underlying funds it holds. Investors hold an interest in the top-level fund, which in turn holds interests in several underlying funds. Each layer has its own manager, terms and documents.
What are fund of funds fees?
Fund of funds fees are often layered, meaning the fund of funds manager may charge fees and the underlying funds charge their own as well. The specific terms vary and are described in each offering's documents. Ask your licensed advisers to help you understand how the layers combine.
What is a private equity fund of funds?
A private equity fund of funds is a fund of funds that invests in private equity funds rather than directly in private companies. It is one form of multi-manager investing. Private equity investments are speculative and illiquid and can lose all of their value.
What is the difference between a fund of funds and direct fund investment?
With direct fund investment, an investor commits to individual funds themselves, while a fund of funds commits on the investor's behalf through one vehicle. Direct investing may offer more control but requires more research and administration. A fund of funds may simplify that work but can add a layer of fees.
What are secondary funds, explained simply?
Secondary funds buy existing interests in private funds or portfolios from earlier investors rather than making new commitments to a fund. Some fund of funds vehicles focus on secondaries. They carry their own risks, including illiquidity and the possible loss of all invested value.
Educational resource. The Hastings Fund shares general information and connects people with independent fund managers. It is not professional advice. Talk with a qualified professional about your own situation.