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.
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. Pension funds, endowments and other institutions often invest in funds of hedge funds for part or all of their "alternative asset" programs, i.
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. The due diligence and safety of investing in FOFs has come under question as a result of the Bernie Madoff scandal, 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.
The due diligence of the FOFs apparently did not include asking why Madoff was not making this charge for his services. 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.
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. 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 to Preqin formerly known as Private Equity Intelligence , in , funds investing in other private equity funds i. The following ranking of private equity FOF investment managers is based on information published by Private Equity Intelligence:.
Preqin formerly known as Private Equity Intelligence . A fund of hedge funds is a fund of funds that invests in a portfolio of different hedge funds to 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 fund's management and performance fees, which can be 1. Fees can reduce an investor's profits and potentially reduce the total return below what could be achieved through a less expensive mutual fund or exchange-traded fund ETF.
A fund of venture capital funds is a fund of funds that invests in a portfolio of different venture capital funds for access to private capital markets. Clients are usually university endowments and pension funds. From Wikipedia, the free encyclopedia. This article needs additional citations for verification.
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