Fund of Funds

A fund of funds is a pooled vehicle that invests in other funds rather than building its portfolio mainly from individual stocks, bonds, or other securities.

That structure gives investors a packaged way to reach multiple managers, strategies, or asset classes through one fund. The tradeoff is that the extra layer of management can also add cost and complexity.

How It Works

A fund of funds allocates capital across underlying funds. Those underlying vehicles may be mutual funds, hedge funds, private funds, or a mix of strategies depending on the mandate.

The result is a two-layer structure:

• the top-level fund sets the allocation
• the underlying funds run the actual portfolio exposures

Why It Matters

This structure can help investors:

• diversify across managers or strategies
• outsource manager selection
• reach markets that are hard to assemble one fund at a time

At the same time, investors have to evaluate overlapping holdings, layered fees, and whether the extra diversification is meaningful rather than decorative.

Fund of Funds vs. Feeder Fund

A fund of funds spreads capital across multiple underlying funds. A feeder fund usually sends capital into one master fund inside a master-feeder structure. The names sound similar, but the portfolio mechanics are different.

Related Terms

• Feeder Fund: Distinct structure that usually channels money into one master fund.
• Investment Pools: Broader category of pooled investment structures.
• Mutual Fund: One common underlying vehicle inside a fund-of-funds structure.
• Exchange-Traded Fund: Another pooled vehicle that may appear in multi-fund allocation strategies.