Fund of Funds: The Dream Team of Investing
When you’re looking to win championships—not just a few regular-season games—you don’t rely on a single player. You build a Dream Team. That’s what a fund of funds (FoF) does: it recruits the best managers across the market to give you diversified, all-star performance.
What is a Fund of Funds?
Think of a fund of funds like a basketball GM assembling a roster of the league’s top talent. Instead of betting everything on one hot shooter, you’re stacking your lineup with scorers, defenders, and playmakers—different managers with unique strategies—all working to win for you (combing private equity, venture capital, real estate, private credit and/or other fund types all into one fund structure).
Benefits: Why Build a Championship Roster?
Diversification — Like a team with stars at every position, FoFs spread your risk so you’re not exposed to just one manager’s bad night.
Access to Top Talent — Some of the best managers are like exclusive players—hard to sign unless you’re part of the right network. FoFs can get you a seat at the table.
Professional Coaching — FoF managers act like legendary coaches, scouting and subbing in funds to keep your portfolio performing at the highest level.
Watch Out for Turnovers
Double Fees: The Salary Cap Problem — Just like a team paying max contracts can run into salary cap issues, FoFs charge fees on top of what underlying managers already take. This can eat into your scoring margin—i.e., your net returns.
Liquidity: Locked in for the Season — In some FoFs, your capital can be tied up like a long-term player contract, limiting your ability to trade out if you need cash.
Complexity: Tracking Stats — With so many players (funds) on the court, it can be tough to know who’s really delivering the points.
How to Evaluate a Fund of Funds Like a GOAT
Know the Fee Structure — Don’t get caught with a bloated payroll; understand every fee, from management costs to performance bonuses.
Scout the Recruiting Process — Great teams win because they pick great players; make sure your FoF has a proven strategy for picking the right managers.
Analyze the Box Score — Go deeper than headline returns. Look at consistency, defensive stats (downside protection), and clutch performance in market downturns.
Check the Contract Terms — Are you locked in like a 5-year rookie deal, or do you have flexibility if you want to trade out?
Demand Regular Reports — The best teams watch film after every game; you should expect clear updates to know who’s hot and who’s cold in your portfolio.
Final Buzzer: Are You Ready to Build Your Dream Team?
Fund of funds are the ultimate way to assemble an all-star lineup of money managers, but just like a championship team, success requires careful planning, scouting, and understanding your salary cap (fees). Get it right, and you’re not just playing the game—you’re changing it.
If you are interested in learning more about fund of funds and how they could benefit your portfolio drop us a note.