What Is a Fund of Funds?
Understand how fund of funds invest in multiple underlying funds to provide diversification and access to specialised investment strategies.
Key Takeaways
- A fund of funds invests in a portfolio of other investment funds rather than directly in companies or assets.
- It provides diversification across managers, strategies, geographies, and vintages.
- The structure involves an additional layer of fees but offers access to funds with high minimums.
What a Fund of Funds Is
A fund of funds is an investment vehicle that allocates capital across a portfolio of underlying funds rather than investing directly in individual companies or assets. This approach provides investors with diversification across multiple fund managers, investment strategies, sectors, and geographies through a single commitment. Fund of funds structures are common in private equity, venture capital, hedge funds, and real estate investing.
How Fund of Funds Work
Investors commit capital to the fund of funds, which is managed by a team responsible for selecting, monitoring, and managing relationships with underlying fund managers. The management team conducts due diligence on potential fund investments, negotiates terms, and constructs a portfolio balancing risk and return. In Africa, fund of funds like the Sango Capital and initiatives backed by the AfDB invest across multiple private equity and venture capital funds operating on the continent.
Advantages and Disadvantages
The primary advantage is diversification; a single commitment provides exposure to dozens of underlying investments across funds. Fund of funds also offer access to top-tier managers whose funds have high minimum commitments that individual investors cannot meet. The main drawback is the double fee layer: investors pay management fees and carry to both the fund of funds and each underlying fund, reducing net returns compared to direct fund investments.
Who Uses Fund of Funds
Institutional investors such as pension funds, sovereign wealth funds, and endowments often use fund of funds to gain exposure to alternative asset classes without building large internal investment teams. Smaller institutions and family offices also use them to access diversified portfolios of top-performing managers. For investors seeking exposure to African private markets, fund of funds provide a practical entry point with professional manager selection and oversight.