What Is a Fund Of Funds (FOF)?
A fund of funds (FOF)—also referred to as a multi-manager investment—is a pooled investment fund that invests in other sorts of funds. In other words, its portfolio contains different underlying portfolios of other funds. These holdings replace any investing directly fettered , stocks, and other sorts of securities.
FOFs usually invest in other mutual funds or hedge funds. they’re typically classified as “fettered,” or only ready to invest in funds managed by the FOF’s managing company, or “unfettered,” or ready to invest in funds across the market.
How a Fund Of Funds Works
The fund of funds (FOF) strategy aims to realize broad diversification and appropriate asset allocation with investments during a sort of fund categories that are all wrapped into one portfolio.
There are different sorts of FOFs, with each type working on a special investment scheme. A FOF could also be structured as a open-end fund , a hedge fund, a personal equity fund, or an investment company . The FOF could also be fettered, meaning it only invests in portfolios managed by one investment trust . Alternatively, the FOF are often unfettered, letting it invests in external funds controlled by other managers from other companies.
A fund of funds (FOF) may be a pooled fund that invests in other funds.
FOFs usually invests in other hedge funds or mutual funds.
The fund of funds (FOF) strategy aims to realize broad diversification and minimal risk.
Funds of funds tend to possess higher expense ratios than regular mutual funds.
Fund of Funds Advantages
Typically, FOFs attract small investors who want to urge better exposure with fewer risks compared to directly investing in securities—or even in individual funds. Investing during a FOF gives the investor professional wealth management services and expertise.
Investing during a FOF also allows investors with limited capital to tap into diversified portfolios with different underlying assets. Many of those would be out-of-reach for the typical retail investor. for instance , hedge funds typically require six-figure minimum investments or require investors to possess a minimum net worth—or both.
Most FOFs require a proper due-diligence procedure for his or her fund managers—both their own and people managing the underlying funds. Applying managers’ backgrounds are checked, which ensures the portfolio handler’s background and credentials within the market .
Ultimate in diversification
Professional management expertise
Alleviation of risk and volatility
Exposure to assets usually beyond small investors
Additional layer of fees
Risk of overlap in holdings
Difficulty find qualified managers, funds
Fund of Funds Disadvantages
Though FOFs provide diversification and fewer exposure to plug volatility, these returns could also be lessened by investment fees that are typically above traditional investment . Higher fees come from the compounding of fees on top of fees.
Like most mutual funds, a FOF carries an annual operating expense—known because the expense ratio—as well as management fees and operating costs. However, FOFs investors are essentially paying double—because the underlying funds within the FOF all have their annual costs and costs , too.
In the past, funds of funds’ prospectuses didn’t always include the fees of the underlying funds. As of January 2007, the SEC began requiring that these fees be disclosed during a line called Acquired Fund Fees and Expenses (AFFE).
A fund of funds might charge annual management fees of 0.5% to a quarter to take a position in funds that charge another 1% annual management fee. So, the FOF investor in sum is paying up to twenty . Small wonder that, after allocating the cash invested to fees and other payable taxes, the returns of fund of funds investments may generally be lower compared to the profits that single-manager funds can provide—even if the funds perform alright .
Picking good fund managers and funds are often difficult, too—especially if the FOF is fettered. The FOF may find yourself owning an equivalent stock or other security through several different funds, thus reducing the particular diversification.
Real World Example for Fund of Funds
Since they’re so varied, funds of funds are often hard to trace as a gaggle and to match . However, an index does exist. The Barclay Fund of Funds Index, sponsored by Barclay-Hedge, a provider of knowledge on alternative investments, may be a measure of the typical return of all FOFs that report into the corporate database; it includes some 500 to 650 funds. As of March 2019, 583 funds had an averaged return of three .95% year-to-date.