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 or investment trust FoF.
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.
Pros & cons
These funds are designed to achieve even greater diversification than traditional collective investment schemes. On the downside, management fees on fund of funds are typically higher than those on tradition 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 stocks, 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 funds for part or all of their "alternative asset" programs, i.e. investments other than traditional stock and bond holdings.
Criticisms
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.Some examples
Vanguard STAR is a popular US mutual fund that invests in other Vanguard mutual funds. Assets include US and non-US stock funds, long and short-term bond funds, a GNMA fund, and a money market fund. The fund does not, itself, 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.
See also
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Collective investment schemes:
Common contractual funds • Fonds commun de placements • Investment trusts • Hedge funds • Unit trusts • Mutual funds • ICVC • SICAV • Unit Investment Trusts • Exchange-traded funds • Offshore fund • Unitised insurance fund
Styles and theory: Active management • Passive management • Index fund • Efficient market hypothesis • Socially responsible investing • Net asset value Related Topics: List of asset management firms • Umbrella fund • Fund of funds • UCITS |
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