Fund of funds

A fund of funds is a collective investment vehicle that invests in other funds. Funds of funds have become increasingly popular in recent years. They are often sold as multi-manager fund: see the page on Multi-manager funds for comments on marketing and performance claims.

Advantages to investors

The main advantage to investors is that they have access to investments that are not directly available to retail investors. This is why funds of hedge funds have been particularly successful.

Advocates of funds of funds often claim they offer better diversification. This is largely illusory. The difference between a fund of funds and any well diversified fund with the same geographical and sector mandate is very unlikely to be significant.

Funds of funds add an extra layer of costs. This is not as bad as it would appear as funds of funds can often invest more cheaply than a retail investors would be able to do directly. However, retail investors are still picking, and paying for, a fund manager whose only real role is to pick other fund managers. There is a saving to be made cutting out the middleman.

Advantages to fund managers

Probably more important to the popularity of funds of funds are their advantages to fund managers.

Funds of funds allow fund managers to expand the range of products they have to sell, without incurring too much in the way of costs.

They also allow less highly regarded (or less well performing) fund management companies to claim that they offer funds that are being managed by managers with better reputations. A fund of funds can be marketed on the track records of the funds it is investing in, rather than that of the managers running it.

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