FOF

FOF stands for fund of funds, an investment vehicle that allocates capital to a portfolio of other funds rather than directly to stocks, bonds, or other securities. FOFs are offered as mutual funds, hedge funds, private equity funds, and other structures. The objective is to achieve diversification and professional due diligence by pooling money to many managers and strategies within a single vehicle.

How it works: A fund of funds manager conducts due diligence on eligible underlying funds, selects a diversified mix, and monitors risk and performance. Investors gain exposure to multiple managers and asset classes with a single investment, while the underlying funds handle day-to-day trading and investments.

Costs and risks: FOFs typically charge both an annual management fee and a layer of performance or incentive fees on top of the fees charged by underlying funds. This can result in higher total costs and potential duplication of investment strategies. Illiquidity can also be an issue, depending on the liquidity terms of the underlying funds.

Benefits and drawbacks: Advantages include broad diversification, professional manager oversight, and access to strategies or managers not typically available to individual investors. Disadvantages include higher fees, opacity about underlying holdings, possible overlapping exposures, and reduced liquidity.

Regulation and contexts: In the United States, mutual fund of funds are registered investment companies subject to the Investment Company Act of 1940 and SEC oversight; hedge fund of funds are typically regulated as investment advisers and may carry different requirements. In Europe, UCITS regulations allow funds of funds that distribute across member states, with standardized risk controls. In private markets, fund of funds can provide access to private equity, venture capital, and real assets through a single vehicle.