Fund of Funds

A fund of funds is an investment fund that invests in other funds, so a layer of fund selection sits between you and the underlying investments.

Why a fund of funds matters to your portfolio

Handing off selection still leaves you exposed to losses and to uncertain access to cash. It can also make the underlying exposure harder to see: different funds may back similar businesses or depend on the same economic conditions.

The useful distinction is what you own and who decides. You pick the fund of funds. Its manager picks the underlying funds, and their managers pick investments within their mandates. A mandate is the range of investments a manager is allowed to pursue.

Keep that chain readable in your records. A label on a statement is where you start learning about exposure, not proof of diversification. The private investment concentration guide explains why overlap matters across categories.

How a fund of funds is used

Investing through a fund of funds means choosing a manager to select underlying funds instead of selecting each fund yourself. The lesson is to match who does the selecting to the experience you actually have. Delegating changes the decision you're making; you still have to judge whether the resulting exposure fits your purpose.

Example: you already hold a venture fund and you're looking at a fund of funds. Your record gives them different labels. Reading closer, you find both mandates cover similar startup markets. You note the likely overlap and mark its size as unknown where the information runs out.

The fund of funds is the vehicle; venture exposure is what may sit underneath. Counting labels can't tell you whether you're exposed to different risks. The private market portfolio map ties vehicle descriptions back to your purpose and your existing holdings.

Common mistakes

Assuming delegated selection removes the need for judgment confuses who chooses with whether the choice is sound. A manager's involvement doesn't remove uncertainty about the underlying investments or when cash comes back.

Treating missing information as proof of no overlap is the other trap. If the underlying exposure is unclear, write that down. A familiar category name doesn't show that separate managers are doing different things.

You'll still have work to do: reading reports and rechecking fit when your circumstances change.

Related terms

Angel investing can involve picking companies yourself, though selection can also be delegated. Due diligence covers investigating an investment case, including one built on delegated selection.

Source notes

The delegated-selection explanation draws on an investor interview; the example is illustrative.