For the Swiss investment fund, seeInvestors Overseas Service.
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Afund of funds(FOF) is aninvestment strategyof holding a portfolio of other investment funds rather than investing directly instocksbondsor othersecurities. This type of investing is often referred to asmulti-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 ofcollective investment scheme(typically one type per FOF), for example amutual fundFOF, ahedge fundFOF, aprivate equityFOF, or aninvestment trustFOF.1The original Fund of Funds was created byBernie Cornfeldin 1962. It went bankrupt after being looted byRobert Vesco.2
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 greaterdiversification. According tomodern 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 feesfor FOFs are typically higher than those on traditional investment funds because they include the management fees charged by the underlying funds.3
In its article on Funds of Funds, Investopedia notes that, Historically, a fund of funds showed an expense figure that didnt always include the fees of the underlying funds. As of January 2007, theSECbegan requiring that these fees be disclosed in a line called Acquired Fund Fees and Expenses (AFFE).45
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.6
Pension funds, endowments and other institutions often invest in funds of hedge funds for part or all of their alternative asset programs, i.e., investments other than traditional stock and bond holdings.citation needed
Thedue diligenceand safety of investing in FOFs has come under question as a result of theBernie Madoffscandal, where many FOFs put substantial investments into the scheme. It became clear that a motivation for this was the lack of fees by Madoff, which gave the illusion that the FOF was performing well. Thedue diligenceof the FOFs apparently did not include asking why Madoff was not making this charge for his services.72008 and 2009 saw FOFs take a battering from investors and the media on all fronts from the hollow promises made by over-eager marketers to the strength (or lack) of their due diligence processes to those carefully explained and eminently justifiable extra layers of fees, all reaching their zenith with the Bernie Madoff fiasco.8
These strategic and structural issues have caused fund-of-funds to become less and less popular. Nonetheless, fund-for-funds remain important in particular asset classes, including venture capital and for particular investors in order for them to be able to diversify their too low or too high level of assets under management appropriately.9
The FOF structure may be useful for asset-allocation funds, that is, anexchange-traded fund(ETF) of ETFs or mutual fund of mutual funds. For example,iShareshas asset-allocation ETFs, which own other iShares ETFs.10Similarly,Vanguardhas asset-allocation mutual funds, which own other Vanguard mutual funds. The parent funds may own the same child funds, with different proportions to allow for aggressive to conservative allocation. This structure simplifies management by separating allocation from security selection.
A target-date fund is similar to an asset-allocation fund, except that the allocation is designed to change over time. The same structure is useful here.iShareshas target-date ETFs that own other iShares ETFs; Vanguard has target-date mutual funds that own other Vanguard mutual funds. In both cases, the same funds are used as the asset-allocation funds. Since a provider may have many target dates, this can greatly reduce duplication of work.
According toPreqin(formerly known as Private Equity Intelligence), in 2006, funds investing in otherprivate equity funds(i.e., FOFs, includingsecondary funds) amounted to 14% of all committed capital in theprivate equitymarket. The following ranking of private equity FOF investment managers is based on information published byPrivate Equity Intelligence:
Source: Preqin (formerly known as Private Equity Intelligence)11
According to 2011 Preqin Global Private Equity Report, largest firms by total FOF capital raised in the last ten years ($bn) are:
Afund of hedge fundsis a fund of funds that invests in a portfolio of differenthedge fundsto provide broad exposure to the hedge fund industry and to diversify the risks associated with a single investment fund. Funds of hedge funds select hedge fund managers and construct portfolios based upon those selections. The fund of hedge funds is responsible for hiring and firing the managers in the fund. Some funds of hedge funds might have only one hedge fund in them, which lets ordinary investors into a highly acclaimed fund, or many hedge funds.
Funds of hedge funds generally charge a fee for their services, always in addition to the hedge funds management and performance fees, which can be 1.5% and 15-30%, respectively. Fees can reduce an investors profits and potentially reduce the total return below what could be achieved through a less expensivemutual fundorexchange-traded fund(ETF).
Afund of venture capital fundsis a fund of funds that invests in a portfolio of differentventure capital fundsfor access to private capital markets. Clients are usually university endowments and pension funds.13
Bernard Cornfeld, operator of perhaps the first Fund of Funds from 1962 until its collapse in 1970..
De Vries, M. F. R. The entrepreneurial personality: a person at the crossroads.
Opalesque (28 August 2009).Fund of funds take a public beating in post-Madoff era.
When Fund-Of-Funds for Venture Work – Square 1 Bank.
iShares Adds Four Allocation ETFs to Core Lineup – Yahoo Finance. Yahoo! Finance.
Prequin (search for LP League Tables). Based on analysis provided by Preqin an independent provider of private equity data and information. Private Equity Fund of Funds Managers, Located Anywhere, Data for Capital Currently Committed to PE
Prequin. Based on analysis provided by Preqin an independent provider of private equity data and information. The 2011 Private Equity Report. – Fund of Fund Managers Key Stats and Facts
TrueBridge (27 August 2009).Market Analysis: State of the Venture Capital Industry.
Private equity fund of fundsAltAssets, 08/01/2003
Investing in Private Equity through a Fund of Funds
ALTERNATIVE ASSETSPRIVATE EQUITY FUND OF FUNDS
Loan qualifying investor alternative investment fund(LQIAIF)
Qualifying investor alternative investment fund(QIAIF)
History of private equity and venture capital
Capital asset pricing modelalphabetasecurity characteristic line)
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Articles with unsourced statements from November 2013
This page was last edited on 14 September 2019, at 08:00