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What Is a Fund of Funds?

A fund that invests in other funds, offering diversification and access at the cost of a second layer of fees.

Last updated 8 August 2026 · 2 min read

A fund of funds is a fund that invests in other funds rather than directly in companies or securities. It gives investors instant diversification across many managers and access to funds they could not reach alone, in exchange for paying a second layer of fees on top of the underlying funds.

A fund of funds is exactly what it sounds like, and understanding it is mostly a matter of following the fees. It offers something genuinely useful, diversification and access, but it charges for the privilege twice.

What it is

A fund of funds (FoF) is a fund that invests in other funds rather than directly in companies, stocks or bonds. When you put money in, the FoF manager spreads it across a portfolio of underlying funds, hedge funds, private equity funds, or others, chosen and monitored on your behalf.

What it offers

Two real benefits explain why fund of funds exist:

  • Instant diversification. A single investment gives you exposure to many managers and strategies at once, reducing the risk that any one fund's failure hurts you badly.
  • Access. A FoF can get you into funds that have high minimums or are closed to new investors, because it invests at scale and has relationships you may not.

For an investor without the resources to research, access and monitor a dozen funds directly, a FoF provides professional selection in one package.

The catch: two layers of fees

Here is the cost, and it is significant. In a fund of funds you pay fees twice. You pay the FoF its own management fee (and sometimes performance fee), and you bear the fees of every underlying fund it holds, each charging its own 2 and 20 or similar. That double layer compounds against you year after year, and it is the main reason critics are wary of the structure: the diversification is real, but so is the drag on returns.

When it makes sense

A fund of funds suits an investor who values diversification and access over cost, and who lacks the capability to build a fund portfolio alone, a smaller institution, or a family newer to private markets.

For a large family office, the calculus usually runs the other way. Once an office can access top funds directly, negotiate its own terms, and increasingly co-invest at reduced fees, paying a second layer for someone else to choose funds becomes hard to justify. This is a large part of why sophisticated families have moved away from funds of funds and toward direct fund investing, co-investment and direct deals: they would rather own the fee than pay it twice.

Frequently asked questions

What is a fund of funds?
A fund of funds (FoF) is an investment fund whose holdings are other funds, rather than stocks, bonds or companies directly. It spreads an investor's money across many underlying managers, providing diversification and access to hard-to-reach funds, at the cost of an extra layer of fees.
What are the drawbacks of a fund of funds?
Mainly a double layer of fees: you pay the fund of funds its fee, and you also bear the fees of every underlying fund it invests in. That extra cost drags on returns. There is also less transparency and control over the individual investments, since the FoF manager chooses them.
When does a fund of funds make sense?
When an investor wants instant diversification across many managers, access to funds with high minimums or closed to newcomers, and professional selection, without the resources to build and monitor a portfolio of funds themselves. For large family offices that can access funds directly, the extra fee layer often makes a FoF hard to justify.

This guide is educational and general in nature. It does not constitute investment, legal, tax or financial advice.