Fund of funds

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A "fund of funds" (FoF) is an investment fund that uses an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. This type of investing is often referred to as multi-manager investment.

There are different types of 'fund of funds', each investing in a different type of collective investment scheme (typically one type per FoF), eg. 'mutual fund' FoF, hedge fund FoF, private equity FoF or investment trust FoF.

Contents 1 Advantages 2 Disadvantages 3 Fettered or unfettered 4 Criticisms of fund of hedge funds 5 Some examples 6 See also 7 References

[edit] Advantages

Investing in a collective investment scheme will increase diversity compared to a small investor holding a range of securities directly. Investing in a fund of funds arrangement will achieve even greater diversification.

An investment manager may actively manage your investment with a view to selecting the best securities. A FoF manager will try to select the best performing funds to invest in based upon the managers past performance and other factors. If the FoF manager is skillful, this additional level of selection can provide greater stability and take on some of the risk relating to the decisions of a single manager. As in all other areas of investing, there are no guarantees for regular returns.

[edit] Disadvantages

Management fees for funds of funds are typically higher than those on traditional investment funds because they include part of the management fees charged by the underlying funds.

Since a fund of funds buys many different funds which themselves invest in many different securities, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings.

Funds of funds are often used when investing in hedge funds, as they typically have a high minimum investment level compared to traditional investment funds which precludes many from investing directly. In addition hedge fund investing is more complicated and higher risk than traditional collective investments; this lack of accessibility favours a FoF with a professional manager and built in spread of risk.

Pension funds and other institutions often invest in funds of hedge funds for part or all of their "alternative asset" programs, i.e. investments other than traditional stock and bond holdings.

[edit] Fettered or unfettered

Some investment managers offering retail FoF may limit the fund selection to only include the range of funds they manage; this type of arrangement is called a fettered fund of funds. Most FoF offerings include funds from various investment managers and are called unfettered fund of funds.

[edit] Criticisms of fund of hedge funds

While funds of funds conceptually can provide extremely useful services for many hedge fund investors, they have been criticised for the significant incremental costs they impose. (The underlying hedge funds usually charge fees of between 1 and 2% of assets managed and incentive fees of 15–25% of profits generated. The funds of funds typically add additional fees of 1% and 10%, respectively). Moreover, fund-of-funds behavior has often exhibited crowd-following tendencies, suggesting the managers of these funds prefer to match indices rather than seek opportunities.

The industry has recently been criticized by some hedge fund managers for a reputation of holding a short-term view. Some hedge funds have even started turning away fund of hedge funds money. “It is really beginning to irritate those funds of hedge funds that approach their investments sensibly,” says one fund of hedge funds manager.^[1]

[edit] Some examples

Vanguard STAR is a popular U.S. mutual fund that invests in other Vanguard mutual funds. Assets include U.S. and non-US stock funds, long and short-term bond funds, a GNMA fund, and a money market fund. The fund itself does not have any fee.

A similar one is "Vanguard Life Strategy Moderate Growth", which invests in four other Vanguard funds, and again has no fee itself.

In India, ICICI Bank is planning to start a large private equity fund of funds.

According to Private Equity Intelligence, in 2006 funds investing in other private equity funds (i.e., fund of funds, including [[private equity secondary market | secondary funds) amounted to 14% of all committed capital in the private equity market.

[edit] See also

• Collective investment schemes
• Investment management
• Manager of managers fund

[edit] References

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