What Is a Fund of Funds?
We explain what fund of funds are and why institutional investors use them.
- A fund of funds is one that allocates institutional or individual capital to a range of funds, as a means to diversify investments and spread risk.
A fund of funds is a diversification strategy used by investors wanting exposure to multiple funds, fund managers and investment strategies to spread risk. A fund of funds generally raises money from institutions such as pension funds, high-net-worth investors, sovereign wealth funds and family offices to deploy capital to multiple funds.
The product enables capital-efficient access to multiple managers who would otherwise require significant minimum investment levels if approached individually. Fund of funds also offer diversification across strategies and performance outcomes. Fund of funds take a management fee from investors but also pay management fees to each fund they invest in and potentially a portion of gains, meaning it can be a costlier product.
Fund of funds have played an important role in the private equity (PE) ecosystem, providing capital to new fund managers, known as ‘emerging managers’. In fact, in the EU and UK, some funds of funds in venture capital (VC) come from taxpayer money as part of official efforts to nurture business growth, such as the European Tech Champions Initiative (ETCI).
However, in recent years, data shows the product has fallen out of favor. In 2025, only $24.2bn was raised by private market fund of funds, compared to $80.6bn in 2020, according to PitchBook data. PitchBook analysts wrote that detractors of the product often cite multiple fee layers as a reason for higher costs and this reason partially explained the drop off in investor interest.
PE fund of funds new capital raised
Sometimes funds of funds emerge from advisors to family offices who, over time, manage investments for more and more families looking to preserve generational wealth. These advisors often call themselves ‘multi-family office advisors’ before launching a regulated offering in the form of a fund of funds.
The skill set of a fund-of-funds manager differs from that of a PE or VC fund manager. It relies not only on analyzing fund data but also on looking at fund managers’ past experiences, strategic networks, and unique thesis on how the world is changing.
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