Quora Answer: What are the Benefits of Fund of Funds?

The following is my answer to a Quora question: “What is a fund of funds in venture capital?  What are the benefits?” 

A fund of funds is merely a pooled investment fund which invests in other types of funds.  This means its portfolio is the various underlying portfolios of the funds it invests in.  A fund of funds does not invest directly in equity, debt instruments, and any other types of securities or derivatives.  If a fund of funds has a mandate that only allows it to invest in funds managed by its own management, it is a fettered fund of funds.  It if has no such restriction, then it is unfettered. 

Funds of funds are attractive to smaller investors seeking better exposure, but fewer risks, because the funds of funds do not invest directly in securities or stocks.  It is a fund that has spread its risk by investing in other funds, even if those other funds are hedge funds, since they normally balance that portfolio by investing in mutual funds.  This makes it a cheaper way of immediately diversifying a portfolio. 

Furthermore, because funds of funds pool from smaller investors, it grants them access to funds that the average retail investors would normally not be able to afford such as select hedge funds, or specialised funds by major fund managers.  These funds normally have a minimum investment that is in the hundreds of thousands or up to tens of millions; they they require accredited investors – meaning a minimum net worth.