Multi-Manager Investing: What It Is and How It Works

Multi-manager investing means that a single vehicle or program allocates money to more than one outside manager, each running their own strategy. The structure is often called a fund of funds, and sometimes a multi-manager platform or portfolio.

The idea is diversification of people and approaches, not just of assets. Instead of relying on one manager's judgment, the investor holds exposure to several managers who may focus on different strategies, sectors, regions or vintages.

The approach can be used with private funds, such as private equity, venture capital, real estate or credit, and it often includes secondaries, where existing fund interests are bought from other holders. Private fund investments are speculative and illiquid and can lose all of their value.

Traditionally, investors who wanted access to several managers either built their own set of relationships or used a fund of funds run by a sponsor that selects and monitors managers on their behalf.

Many funds of funds charge a layer of fees on top of the fees charged by the underlying managers. Some investors view that added layer as a cost of selection, oversight and administration. Others prefer to select managers directly. Both views are common.

Participation in private funds is generally limited to accredited investors under SEC Rule 501(a). Categories include certain individuals meeting income or net worth tests set out in the rule, holders of Series 7, 65 or 82 licenses in good standing, and knowledgeable employees of a private fund. They also include spousal equivalents, entities and family offices with more than $5 million in investments or assets, and registered investment advisers and exempt reporting advisers. Offerings are typically made under Rule 506(b), which prohibits general solicitation, or Rule 506(c), which allows general solicitation but requires that all purchasers be accredited and that the issuer take reasonable steps to verify.

The right fund manager may help you understand how a multi-manager structure is built, including how managers are chosen, how capital is allocated among them, and how the portfolio is monitored over time. A good conversation can make the moving parts easier to follow.

A first conversation is usually about your situation and goals, your time horizon, and how much illiquidity you can comfortably accept. You might ask how the manager selects and reviews underlying managers, what the full fee picture looks like at each layer, and what the reporting looks like, including whether you would receive a K-1.

You can also ask about concentration, how long capital is typically committed, what happens if you need access to money sooner, and what risks the manager sees. Offerings come only from the issuer through its own offering documents. Please review those and consult your own licensed attorney, tax professional and financial adviser. Past performance does not guarantee future results.