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Concept
Fund of funds
Summary
A "fund of funds" (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This type of investing is often referred to as multi-manager investment. A fund of funds may be "fettered", meaning that it invests only in funds managed by the same investment company, or "unfettered", meaning that it can invest in external funds run by other managers.
There are different types of FOF, each investing in a different type of collective investment scheme (typically one type per FOF), for example a mutual fund FOF, a hedge fund FOF, a private-equity FOF, or an investment trust FOF. The original Fund of Funds was created by Bernie Cornfeld in 1962. It went bankrupt after being looted by Robert Vesco.
Investing in a collective investment scheme may increase diversity compared with a small investor holding a smaller range of securities directly. Investing in a fund of funds may achieve greater diversification. According to modern portfolio theory, the benefit of diversification can be the reduction of volatility while maintaining average returns. However, this is countered by the increased fees paid both at FOF level and at the level of the underlying investment fund.
Management fees for FOFs are typically higher than those on traditional investment funds because they include the management fees charged by the underlying funds.
In its article on Funds of Funds, Investopedia notes that, "Historically, a fund of funds showed an expense figure that didn't always include the fees of the underlying funds. As of January 2007, the SEC began requiring that these fees be disclosed in a line called 'Acquired Fund Fees and Expenses' (AFFE)."
After allocation of the levels of fees payable and taxation, returns on FOF investments will generally be lower than what single-manager funds can yield. However, some FOFs waive the second level of fees (the FOF fee) so that investors only pay the expenses of the underlying mutual funds.
Official source
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