Fund of funds: definition, how it works and advantages for investors

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In the world of investments, diversification is one of the first risk management tools. The fund of funds takes this principle one step further: instead of choosing a selection of securities themselves, investors delegate this task to a management company that invests, on their behalf, in a portfolio of other funds. This two-tier structure has its advantages, notably in terms of access and selection expertise, but also its limits, particularly when it comes to fees. This article details the definition of the fund of funds, how it works, its types, and how this pooling logic applies to private equity.

What is a fund of funds?

A fund of funds is an investment fund whose assets consist not of securities held directly (stocks, bonds, equity stakes), but of units of other funds. In practical terms, the fund of funds' management company does not select companies or issuers itself: it selects funds, managed by other management companies, in which it places the capital collected from its investors.

This approach exists across several asset classes: equities, bonds, real estate, and private equity. In every case, the principle remains the same: the fund of funds acts as a selection intermediary between the investor and the underlying funds, with the aim of stronger diversification and access to a range of managers that an individual could neither identify nor select alone.

How does a fund of funds work?

A fund of funds operates on a cascading delegation logic.

A management company selects underlying funds

The fund of funds' management company defines a strategy (geographic area, asset class, management style, target risk level), then identifies and selects a set of underlying funds consistent with that strategy. This selection relies on an in-depth analysis of each manager: their performance track record, investment method, team quality, size and consistency.

Capital is spread across several funds

Once the selection is made, the capital collected from the fund of funds' investors is spread across the various underlying funds chosen. This allocation can be replicated across dozens of different funds, each of which itself invests in dozens, even hundreds, of securities or equity stakes.

The result: a double layer of diversification

The end investor is exposed, through a single vehicle, to a far broader investment universe than they could have built alone. It is this double diversification, that of the fund of funds and that of each underlying fund, that is the central appeal of this type of structure.

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The different types of funds of funds

The term “fund of funds” covers several realities depending on the asset class and the regulatory framework.

Equity and bond funds of funds

These are the most common in the world of UCITS and life insurance unit-linked policies. They invest in units of UCITS or SICAVs managed by third-party management companies, with an allocation that may be diversified (several asset classes) or specialized (a single geographic area or a single sector).

Real estate funds of funds

These vehicles invest in units of SCPIs or OPCIs rather than in real estate assets directly. They make it possible to spread capital across several management companies and several types of assets (offices, retail, logistics) within a single investment.

Private equity funds of funds

In the world of private equity, a private equity fund of funds invests in the units of several private equity funds (venture capital, growth capital, LBO, secondaries), rather than taking direct stakes in companies. It is the historical structure used by institutional investors to diversify their exposure to unlisted assets without having to select each fund themselves.

The advantages of a fund of funds

• Stronger diversification: exposure to several funds, and therefore to several strategies and several dozen or hundreds of underlying holdings, reduces the risk associated with a single manager or security.
• Access to funds normally reserved for institutional investors: some underlying funds require very high entry tickets. The pooling carried out by the fund of funds allows an individual investor to access them indirectly.
• Delegated selection expertise: identifying the best managers in an asset class requires analytical resources that few individual investors have. The fund of funds transfers this responsibility to a specialized management company.
• Simplified management: a single vehicle, a single subscription, for exposure to a set of funds that would otherwise have had to be selected and monitored individually.

The drawbacks of a fund of funds

• Stacked fees: this is the most frequently cited limit. The investor bears the management fees of the fund of funds, on top of those charged by each of the underlying funds. This double layer of fees can noticeably reduce the net performance received by the end investor.
• Possible dilution of performance: by multiplying the number of underlying funds, a fund of funds can dilute the impact of the best holdings in its portfolio, with a performance profile closer to the average of its management universe.
• Lower transparency: the investor does not always know the exact composition of each underlying fund in detail, which makes analyzing the real risk more complex than with a fund invested directly.
• A sometimes long investment horizon, particularly for private equity funds of funds, whose lifespan follows that of the underlying funds they hold.

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Source: France Invest / Grant Thornton, “Activity Study 2025”, https://www.franceinvest.eu.

Fund of funds and private equity: a similar but distinct mechanism

The traditional private equity fund of funds follows the logic described above: a first level of management fees for the fund of funds, a second level for each underlying fund. It is an effective model for institutional investors, used to this type of structure and the amounts involved, but it remains poorly suited to an individual, both because of the entry ticket required and because of the impact of the double layer of fees on more modest amounts.

Fundora relies on a similar principle, the pooling of subscriptions, but with a different architecture: an FPCI (Fonds Professionnel de Capital Investissement, a professional private equity fund) coupled with SPVs (Special Purpose Vehicles) groups the subscriptions of several individual investors, who then invest directly in the private equity funds selected by Fundora. The minimum subscription amount is thus significantly lowered compared with a direct entry into these funds, with the exact threshold varying according to the strategy open for subscription.

The essential difference with a traditional fund of funds lies in how selection is handled: Fundora identifies and offers access to funds from the global top 25%, with actual management carried out by Kyoseil Asset Management under the mandate, an AMF-approved portfolio management company. This approach favors targeted access to a limited number of carefully selected funds, rather than automatic diversification across a large number of underlying funds as a traditional fund of funds would provide.

The portfolio of strategies already offered by Fundora illustrates this diversity of approaches within unlisted assets: venture capital with strategies such as YC Venture or Nextwave AI, growth capital with Catalyst Growth or Deep Scale Growth, LBO with Montclair LBO, or secondary funds with Soho Secondary. Each strategy gives access to a distinct fund or set of underlying funds, without ever revealing their names, in accordance with the confidentiality rules applicable to this type of investment.

How to choose a fund of funds or an equivalent arrangement

Before subscribing to a fund of funds or a comparable pooling arrangement, several points are worth checking.

Check the management company's approval

Every portfolio management company must hold an AMF approval, which can be checked on the AMF's GECO register. This is a basic point of vigilance before any subscription.

Understand the fee structure

A fund of funds often stacks two levels of fees. It is useful to compare the total fees announced (the vehicle's fees and the underlying funds' fees where they are disclosed) before comparing the gross performance shown by different arrangements.

Analyze the investment horizon and liquidity

A private equity fund of funds remains illiquid for several years. This type of investment is only suitable as part of an overall asset allocation, never for the whole of one's savings, and assumes that you will not need the sums invested before the fund's maturity.

Look at the strategy and the selection of underlying funds

The quality of a fund of funds depends directly on the quality of the selection made by its management company. The selection criteria (historical performance, fund size, targeted sectors, development stage of the companies targeted) give a good indication of the consistency of the strategy offered.

Any investment in a fund of funds, like any private equity vehicle, carries a risk of capital loss, and past performance is no guarantee of future results.

FAQ: fund of funds

What is a fund of funds in simple terms?

A fund of funds is an investment fund that, instead of directly buying stocks, bonds or equity stakes, places its capital in the units of other funds, called underlying funds. It thus adds an extra level of diversification and selection.

What are the main drawbacks of a fund of funds?

The main drawback is the stacking of management fees: those of the fund of funds are added to those of each underlying fund, which can reduce net performance. The dilution of performance and the lower transparency of the portfolio's exact composition are the two other limits regularly cited.

Is a fund of funds safer than a traditional fund?

A fund of funds is not necessarily safer, but it is generally more diversified, since it spreads capital across several underlying funds rather than a single portfolio of securities. This diversification reduces certain specific risks, without removing the risk of capital loss inherent in any investment.

How does a fund of funds select its underlying funds?

The fund of funds' management company analyzes the managers available in the targeted asset class: performance track record, investment method, fund size, quality of the management team. It then builds an allocation across several underlying funds consistent with the fund of funds' stated strategy.

Can the fund of funds logic be found in private equity accessible to individuals?

Yes, in an adapted form. Structures such as the FPCI coupled with an SPV make it possible to pool the subscriptions of several individual investors to give them access to private equity funds normally reserved for institutional investors, with a significantly lower entry threshold than a direct subscription.