Glossary - Fund of Funds (FOF)
A Fund of Funds (FOF) is an investment strategy in which a fund invests in a portfolio of other investment funds rather than directly in stocks, bonds, or other securities. This approach allows investors to achieve diversification across various asset classes and investment strategies with a single investment. FOFs can be found across various asset classes, including hedge funds, private equity, and mutual funds, and they often aim at diversification to reduce risk or to gain access to elite funds.
Also known as
- Multi-Manager Investment
- Multi-Fund Investment
Use cases examples
- Investment Prospectus: The ABC Global Equity Fund of Funds seeks to provide long-term capital growth by investing in a diversified portfolio of equity funds globally, reducing the risk associated with individual investments.
- Annual Report: In the fiscal year 2022, the XYZ Fixed Income Fund of Funds allocated its assets across 15 different bond funds to mitigate risk and enhance yield, showcasing a strategic diversification approach.
Considerations for investors
- Due diligence on the underlying funds is crucial to understand the FOF’s investment strategy, risk profile, and potential for returns.
- Considering the liquidity terms of FOFs, as investments in certain asset classes like private equity may have longer lock-up periods, affecting liquidity.
Considerations for founders
- Understanding the fee structure of FOFs, as investing in them involves additional layers of fees that can impact overall returns.
- Evaluating the performance track record of the FOFs, ensuring they align with the company's investment objectives and risk tolerance.
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