A fund of funds is exactly what it sounds like: a fund that invests in other funds rather than directly in companies. In private markets, that usually means a vehicle that commits capital to a portfolio of private equity, venture capital, private credit or real estate funds. It's one of the main ways investors get diversified exposure to private markets, and an important source of capital for fund managers, especially newer ones.
How a fund of funds works
The structure has three layers:
- Investors (pension funds, insurers, family offices, wealthy individuals, and sometimes retail investors through specialised products) commit capital to the fund of funds.
- The fund of funds manager selects underlying funds and commits capital to them.
- Underlying fund managers invest in companies, properties or loans.
So an investor in a venture fund of funds might end up with indirect exposure to 15 venture funds and, through them, hundreds of startups.
Most private market funds of funds are themselves structured as limited partnerships with a life of around 10 to 15 years, matching or exceeding the life of the underlying funds.
Types of fund of funds
| Type | Focus |
|---|---|
| Primary fund of funds | Commits to new funds as they're being raised |
| Secondary fund | Buys existing fund interests from investors who want to sell. See our secondaries guide |
| Co-investment fund | Invests directly in companies alongside fund managers |
| Emerging manager fund of funds | Focuses on first, second and third-time managers |
| Thematic or regional | Targets a sector (such as climate) or region |
| Multi-strategy | Combines primaries, secondaries and co-investments |
Many modern fund of funds managers blend these approaches, partly to reduce the overall fee burden, since co-investments and secondaries often carry lower fees.
Why investors use a fund of funds
Diversification
Private equity and venture returns vary enormously between managers. Picking a single fund is risky. A fund of funds spreads capital across many managers, strategies and vintage years, reducing the impact of any single poor performer.
Access
The best-performing funds are often oversubscribed and accept capital mainly from existing relationships. Established fund of funds managers may have long-standing relationships that give access investors couldn't get alone.
Expertise
Selecting private market managers requires specialised diligence: analysing track records, interviewing teams, reviewing legal terms and monitoring portfolios. Smaller investors without dedicated teams can outsource this.
Lower minimums
Individual funds may require large minimum commitments. A fund of funds lets investors gain broad exposure with less capital.
Administrative simplicity
Instead of handling capital calls, distributions, reporting and tax documents from many funds, the investor deals with one.
The downside: two layers of fees
The main criticism of funds of funds is cost. Investors pay:
- the underlying funds' management fees and carried interest, and
- the fund of funds manager's own fees, and sometimes carry.
Illustrative fee stack. Underlying funds charge around 2% management fee and 20% carry. The fund of funds charges 0.75% management fee and 5% carry on its own profits. Together, the net return to the end investor can be noticeably lower than the underlying funds' net returns.
Actual fee levels vary widely and have generally come down over time as competition increased. Always look at the total fee burden, not just the top layer.
For a fund of funds to be worth it, its manager needs to add enough value, through access, selection or lower-cost strategies, to justify the extra layer. Some do, many don't. Investors should ask for net returns relative to relevant benchmarks.
Other drawbacks
- Over-diversification: exposure to too many funds can dilute the impact of the best managers, pulling returns towards average.
- Longer J-curve: capital is drawn and invested in stages across two layers, so it can take longer to see positive returns.
- Less control: investors can't choose individual funds.
- Long lock-up: the life of the vehicle can stretch well beyond a decade.
Who funds of funds suit
Funds of funds are most attractive for:
- investors new to private markets who want a diversified starting allocation,
- smaller institutions without in-house private markets teams,
- family offices wanting broad exposure without building a team,
- investors seeking exposure to niche strategies, such as emerging managers or specific regions, where specialist selection matters.
Large institutions with experienced teams often invest directly in funds, sometimes using funds of funds for specific strategies.
Funds of funds as a source of capital for managers
For fund managers, especially emerging managers, funds of funds can be important LPs. Some focus specifically on first-time and early-stage managers. Others run separate emerging manager programs on behalf of large pension funds.
What they look for
- a differentiated strategy and sourcing edge,
- an attributable track record, even if not from a fund,
- a coherent portfolio construction model,
- team stability and alignment,
- solid fund operations and governance,
- a fund size that fits their own commitment size; they typically won't want to be too large a share of a small fund.
How to approach them
- Research their focus. Many funds of funds publish their strategy and sometimes their portfolio managers. Check whether they commit to funds of your size and stage.
- Find a warm introduction from a manager they already back.
- Start the relationship early. Many fund of funds investors meet managers a year or more before committing. Get on their radar before you formally launch.
- Prepare for institutional diligence. Expect detailed questionnaires, reference calls and operational reviews.
Our guide on finding LPs for a first-time fund covers the wider LP landscape.
How to evaluate a fund of funds as an investor
| Question | Why it matters |
|---|---|
| What's the total fee burden? | Combined fees determine net returns |
| What's the track record, net of all fees? | Shows whether the manager has added value |
| How concentrated is the portfolio? | Too many funds can dilute returns |
| What access does the manager have? | The case for a fund of funds rests largely on access |
| How much is in lower-fee strategies? | Co-investments and secondaries can reduce the fee drag |
| How is the team incentivised? | Alignment between the manager and investors |
| What's the expected timeline of capital calls and distributions? | Affects liquidity planning |
Trends in the fund of funds market
The traditional primary fund of funds has faced pressure for years, mainly because of fees and because large investors have built in-house teams. In response, many managers have shifted towards secondaries, co-investments, customised separate accounts and niche strategies such as emerging managers. Another notable trend is the growth of semi-liquid and evergreen private market products aimed at wealthy individuals, some of which use fund-of-funds-like structures. These products come with their own trade-offs around liquidity and valuation, so read the documents carefully.
How a fund of funds builds its portfolio
Manager selection is the core skill of a fund of funds. While approaches vary, most follow a similar process:
- Sourcing managers. Fund of funds teams track hundreds or thousands of managers, meeting many of them years before they invest. Relationships with existing managers, placement agents and other LPs all feed the pipeline.
- Screening. Managers are filtered by strategy, fund size, track record and team stability.
- Due diligence. Deep analysis of attributable track record, investment process, team dynamics, terms, operations and references from founders, co-investors and other LPs.
- Portfolio construction. Deciding how much to commit to each manager to achieve the right balance across strategies, regions, sizes and vintage years.
- Monitoring. Attending annual meetings, sitting on advisory committees, tracking performance and deciding whether to re-up in the manager's next fund.
The re-up decision is one of the most important. Backing a manager across several funds is how fund of funds investors capture value from top performers, and declining to re-up sends a strong signal to the market.
Vintage year diversification
Private market returns depend heavily on when capital is invested. Funds that invest after a market correction often do better than those that invest at the top of a cycle. Because no one can reliably time this, fund of funds managers typically spread commitments across several vintage years. Investors who commit to a series of funds of funds over time get an additional layer of vintage diversification.
Separate accounts and customised mandates
Large investors increasingly ask fund of funds managers for separately managed accounts rather than pooled funds. These let the investor customise the strategy, often at lower fees, while still using the manager's selection expertise and access. For fund managers raising capital, it's worth knowing that a fund of funds may be investing on behalf of both its pooled vehicles and several separate accounts, which can increase the size of commitments available.
Frequently asked questions
What is a fund of funds in private equity?
A fund that invests in a portfolio of private equity funds rather than directly in companies, giving investors diversified exposure across managers and strategies.
Why are fund of funds fees higher?
Investors pay fees to both the fund of funds manager and the underlying fund managers, creating two layers of costs.
Do funds of funds invest in first-time managers?
Some specialise in them. Emerging manager funds of funds and programs focus on first, second and third-time funds.
Is a fund of funds a good investment?
It can be for investors who want diversified private market exposure without building an in-house team, provided the manager adds enough value to justify the extra fees.