Fund of Funds
An investment vehicle that allocates capital across a portfolio of other funds rather than individual securities.
What is Fund of Funds?
A fund of funds (FoF) is an investment vehicle that allocates its capital across a portfolio of other investment funds—such as mutual funds, hedge funds, or private equity funds—rather than directly into individual stocks, bonds, or other securities. This structure offers investors diversification across multiple fund managers and strategies through a single investment, but introduces an additional layer of fees (both the FoF's own management fee and the underlying funds' fees). Fund of funds structures are common in institutional hedge fund investing, private equity, and some retail mutual fund offerings targeted at investors seeking multi-manager diversification.
Example
A pension fund allocates $500 million to a hedge fund of funds that distributes capital across five different hedge fund strategies—equity long/short, global macro, merger arbitrage, distressed debt, and managed futures. The FoF charges a 1% management fee and 10% performance fee on top of each underlying fund's fees, resulting in a meaningful fee drag versus direct hedge fund access.