A fund of funds (FoF) is an investment strategy that invests in a selection of other funds rather than directly purchasing individual securities like stocks and bonds. By investing in multiple underlying funds, a FoF provides an extra layer of diversification aimed at reducing risk and volatility.
Essentially, a FoF pools investors’ money and then purchases shares of different funds based on set investment objectives. The underlying funds may include hedge funds, mutual funds, private equity funds, and real estate funds, among others.
What Is A Fund Of Funds?
A fund of funds is set up with the aim of investing in other funds and investment products rather than individual assets. It typically holds a basket of mutual funds, hedge funds, real estate funds, private equity funds, and other types of funds. The goal is to provide diversification across fund managers, investment strategies, asset classes, and geographies to mitigate risk. A FoF offers easy access to multiple funds under one umbrella.
Structure Of A FoF
A FoF is managed by a professional investment manager who assembles the portfolio of funds. The fund manager carries out due diligence on potential funds to invest in, evaluating their performance, risks, and operations. The FoF makes investments into chosen funds based on stated investment objectives, risk profiles, and other guidelines. The diverse holdings of the underlying funds provide broad market exposure for FoF investors.
Advantages Of Investing In A FoF
Fund of funds (FoFs) offers several advantages for investors:
- They provide an effective means of diversification by investing in a variety of funds across different asset classes, regions, fund managers, and risk profiles. This mitigates the impact of losses in any single fund.
- FoFs give investors access to niche fund categories like hedge funds and private equity that they may not be able to invest in directly.
- FoFs offer convenience as investors need to only choose one consolidated investment instead of selecting multiple funds.
- FoF managers have the resources and expertise to rigorously evaluate and select the underlying funds, which individual investors may lack.
However, FoFs also have some limitations:
- Costs are higher as investors pay fees at both the FoF level and fund level, which can eat into returns.
- Performance may lag that of focused funds during certain market conditions due to the diversified holdings.
- Investors have less control over the constituent funds compared to making direct investments.
Fund Of Funds For Real Estate Investing
Fund of Funds for real estate investing is structured to invest in different real estate syndicates and properties. They provide diversified exposure to real estate markets and segments like residential, commercial, hospitality, retail, healthcare, etc. Investing in a real estate FoF allows participation in larger assets and developments that may not be directly accessible. It also spreads geographic risk across markets. FoF managers can manage liquidity and cash needs efficiently. The cons are higher costs due to added fees and less control over property selection. Overall, FoFs make real estate investing simple and diversified.
To Wrap Up
In summary, a fund of funds simplifies the investing process through bundled multi-fund portfolios under professional management. It enables diversification into varied assets, strategies, and fund managers to mitigate risk and improve returns. Though costs are higher, the convenience and access offered by FoFs make them an attractive investment vehicle, including for real estate exposure. They are an efficient hands-off approach for passive investors to gain broad market participation.