Fund of Funds

Fund of funds

A mutual fund or hedge fund that invests in other funds.

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Fund of Funds

A mutual fund that invests exclusively in other mutual funds. Theoretically, funds of funds allow the investor to diversify risk even more than in a regular mutual fund without reducing return significantly. One disadvantage is the fact that most funds of funds have higher fees because shareholders have to pay fees for the funds of funds themselves and must also pay fees for the underlying funds. Funds of funds were especially popular in the 1960s.

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fund of funds

An open-end investment company that invests only in the shares of other open-end investment companies. This type of mutual fund was popular during the 1960s but subsequently fell into disfavor with investors. Many analysts consider it more of a gimmick than a useful investment vehicle.

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Fund of funds (FOF). A fund of funds is a pooled investment, such as a mutual fund or a hedge fund, whose underlying investments are other funds rather than individual securities.

Despite some major differences, what all funds of funds have in common is an emphasis on diversification for its potential to reduce risk without significantly reducing return.

They're also designed to simplify the investment process by offering one-stop shopping.

Many mutual fund FOFs are asset allocation funds and typically include both stock and bond funds in a particular combination that the FOF manager has chosen to meet a specific objective. A mutual fund FOF may select all its funds from a single fund family or it may choose funds offered by different investment companies.

A hedge fund FOF, which owns stakes in other hedge funds, allows investors to commit substantially less money to gain exposure to this investment category than it would cost to invest in even one fund.

A major drawback with all funds of funds is that the fees tend to be higher than you would pay owning the underlying funds directly.