A fund of funds (FoF) is an investment vehicle that allocates capital across multiple underlying private market funds rather than investing directly in companies or assets. Fund of funds managers serve as intermediaries, providing diversification, access, and professional manager selection to investors who may lack the scale or expertise to build direct portfolios.
The fund of funds model offers several advantages. Instant diversification across managers, strategies, vintage years, and geographies reduces concentration risk. Access to top-tier managers that may be closed to new investors is a key value proposition. Professional due diligence and ongoing monitoring of underlying managers provides a layer of institutional quality control.
The primary criticism of fund of funds is the additional layer of fees. A typical FoF charges 0.5-1.0% management fee and 5-10% carried interest on top of the underlying funds' fees (usually 1.5-2.0% and 15-20%). This double fee structure can reduce net returns by 200-400 basis points relative to direct fund investing. However, fee savings from better manager access and negotiated terms can partially offset this drag.
Our database tracks over 200 fund of funds commitments from pension allocators, providing performance benchmarking data. The data shows that top-quartile fund of funds can deliver net returns competitive with direct fund investing, largely through superior manager selection and vintage year timing. Bottom-quartile FoFs, however, significantly underperform, highlighting the importance of FoF manager selection itself.
The fund of funds model has evolved significantly. Modern FoF managers offer co-investment access, secondary portfolio management, and direct deal flow alongside their core fund selection activities. Some have transitioned to hybrid models that blend fund commitments with co-investments to improve net returns while maintaining diversification benefits.
Fund of funds play a critical role in the GP stakes ecosystem. As aggregators of manager relationships, FoF managers have unique insight into GP quality, fundraising trends, and market dynamics. Several GP stakes buyers originally developed their deal flow through fund of funds relationships, and the convergence of FoF and GP stakes investing continues to grow.