Fund of Funds
An investment fund that allocates its capital across a portfolio of other funds, such as multiple crypto hedge funds, rather than investing directly in individual assets itself.
A fund of funds is an investment vehicle that allocates its capital across a portfolio of other underlying funds — such as several crypto hedge funds (see Kaavon's "Hedge Fund (Crypto)" glossary definition) pursuing different strategies — rather than investing directly in individual crypto assets itself. This gives the fund of funds' own investors diversified exposure across multiple managers and strategies through a single investment, without needing to separately evaluate, select, and allocate to each individual underlying fund themselves.
The tradeoff is an additional layer of fees: investors in a fund of funds typically pay the fund of funds' own management fee (see Kaavon's "Management Fee and Performance Fee" glossary definition) on top of the fees already charged by each underlying fund it invests in, meaning total costs can be meaningfully higher than investing directly in a single fund. In exchange, a fund of funds can offer access, due diligence, and diversification across underlying managers that an individual investor might otherwise find difficult to assemble on their own.
Examples
- An investor allocating to a crypto fund of funds gains diversified exposure across several underlying hedge funds through a single investment, rather than needing to separately evaluate and allocate to each one.
- A fund of funds' total fee burden is typically higher than a single fund's, since investors pay the fund of funds' own fee on top of fees already charged by each underlying fund.