A fund of funds is a diversification strategy used by investors who want exposure to multiple funds, fund managers and theses to spread risk. A fund of funds will generally raise money from institutions such as pension funds, high-net-worth (HNW) investors, sovereign wealth funds and family offices to deploy capital to multiple funds.

The fund of funds takes a management fee from the investors, but also pays a management fee to each fund they invest in and potentially a portion of gains, meaning it is a costlier product. The advantage is that if one fund fails to deliver a return, but another produces a 7X return, you’re better off than if you’d just invested in the initial fund.

Fund of funds are an integral part of the private equity (PE) ecosystem, providing capital to new fund managers, known as ‘emerging managers’. In fact, in the EU and UK, some funds of funds in venture capital (VC) come from taxpayer money as part of official efforts to nurture business growth, such as European Tech Champions Initiative (ETCI).

Other funds of funds emerge from advisors to family offices who, over time, manage investments for more and more families looking to preserve generational wealth. These advisors often call themselves ‘multi-family office advisors,’ before launching a regulated offering in the form of a fund of funds.

The skillset of a fund of funds manager is different from that of a PE or VC fund manager. It relies not only on analyzing fund data but also on looking at fund managers’ past experiences, strategic networks, and unique thesis on how the world is changing.

If you also want to learn more about private equity funds generally, you can read this article too.