What it is
A fund of funds structure places one fund, often called the top-level or feeder fund, above a group of other funds, often called underlying funds. Instead of selecting individual investments itself, the top-level fund allocates capital to other managers who make those selections.
Because the top-level fund pools money from multiple investors, each investor holds an interest in that one vehicle, and that vehicle in turn holds interests in the underlying funds. This creates two layers of management, and often two layers of fees and expenses, which is an important feature to understand.
Funds of funds appear in several areas, including private equity, venture capital, real estate and hedge strategies. Some focus on newer funds, while others focus on secondaries, which are purchases of existing interests in funds from earlier holders.
How it’s traditionally been approached
Traditionally, a fund of funds has been described as a way to access several managers through a single commitment. Supporters of the approach point to the possibility of spreading exposure across different managers, strategies or vintage years, though diversification does not eliminate risk or ensure a particular outcome.
Others take a different view, noting the added layer of fees, reduced visibility into underlying holdings, and less direct control over what the underlying managers buy. Some investors prefer to invest directly in single funds, and both approaches have long been used.
Most private funds are offered under exemptions from registration, often Rule 506(b) or Rule 506(c) of Regulation D. Rule 506(b) does not permit general solicitation. Rule 506(c) allows general solicitation, but all purchasers must be accredited investors and the issuer must take reasonable steps to verify that status. Many investors in these funds must be accredited under SEC Rule 501(a), which includes income or net worth tests, certain licensed professionals (Series 7, 65 and 82 holders), knowledgeable employees of the fund, spousal equivalents, certain entities and family offices with over $5 million in assets or investments, and registered investment advisers and exempt reporting advisers.
How the right fund manager may help
The right independent fund manager may help you understand how a particular structure is organized: what the top-level fund holds, how underlying managers are chosen, and how capital calls, distributions and reporting generally work. A good conversation may also clarify how the structure differs from investing directly in a single fund.
A first conversation is generally informational. You might expect questions about your goals, your time horizon, your need for access to your money, and whether you meet accredited-investor requirements. The manager would typically point you to the offering documents, which are the only place an actual offering is made.
Helpful questions to ask include: What are all the layers of fees and expenses? How long is capital typically locked up? How are underlying managers selected and monitored? What will I receive for tax reporting, such as a K-1, and when? What are the conflicts of interest? Please review any offering with your own licensed attorney, tax professional and financial adviser.
The bigger picture
Decisions about private funds can affect more than a portfolio. Money that cannot be easily accessed may shape how secure or flexible life feels, so it helps to think about how comfortable you are with uncertainty, long timelines and limited liquidity. Many people find that clarity about their own priorities brings more peace of mind than any single structure.
Taking time, asking questions and involving trusted advisers can reduce stress. If financial worry begins to affect your sleep, relationships or health, support from a wellness provider, including resources found through Providers.plus, may be a helpful complement. No approach is right or wrong for everyone.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- A fund of funds structure often involves multiple layers of fees and expenses, which can affect results.
- Past performance does not guarantee future results.
- Tax treatment, including K-1 reporting, depends on individual circumstances, so consult your own licensed tax and legal advisers. The Hastings Fund is an independent directory, not a broker-dealer, funding portal or investment adviser, and nothing here is an offer or solicitation.
Not sure where to start? Answer a few gentle questions and choose who you’d like to hear from.
Create an investor account →Frequently asked questions
What is a fund of funds structure?
A fund of funds structure is a private fund that invests in other funds instead of directly in companies or assets. Investors hold an interest in the top-level fund, which holds interests in the underlying funds. This creates multiple layers of management and often multiple layers of fees.
How does a fund of funds structure work?
The top-level fund pools capital from investors and commits it to several underlying funds run by other managers. Those managers make the individual investment decisions. The top-level manager typically handles selection, monitoring and reporting, as described in the offering documents.
Is a fund of funds structure safer than investing in a single fund?
Not necessarily. Spreading exposure across several underlying funds may reduce reliance on one manager, but it does not remove risk. Private fund investments are speculative and illiquid and can lose all of their value.
Do I have to be an accredited investor to invest in a fund of funds?
Many private funds are offered only to accredited investors under SEC Rule 501(a). Categories include income or net worth tests, holders of Series 7, 65 or 82 licenses, knowledgeable employees of the fund, spousal equivalents, certain entities and family offices with over $5 million in assets or investments, and registered investment advisers and exempt reporting advisers. Requirements vary by offering, so check the offering documents.
What are the fees in a fund of funds structure?
Fees can exist at more than one level: at the top-level fund and within each underlying fund. The specific terms are set out in the offering documents. Ask a manager for a clear explanation of every layer before making any decision.
How is a fund of funds different from a secondaries fund?
A fund of funds typically commits capital to other funds, while a secondaries fund generally buys existing interests in funds or assets from earlier holders. The two ideas can overlap, and some managers combine them. Each carries its own risks and liquidity considerations, so review the offering documents with your own advisers.
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.