What is a Fund of Funds? (2024)

How’s it going, everyone? Today, I want to answer this crucial question for all fund managers out there: What is a Fund of Funds?

Check out this video of me walking through this topic in more detail

The Basics: Understanding the Structure

Let’s break it down with an example. In a typical real estate fund model, you have two main entities:

1. GP (General Partner): The management entity.
2. LP (Limited Partner): The fund entity.

Imagine the fund raises $100 million and uses it to purchase three real estate properties. Now, let’s introduce a new player—the Fund of Funds (FoF).

The FoF is an outside entity that raises its own capital. Instead of directly investing in individual properties, this capital is funneled into the LP entity of the main fund.

Investor Options: Direct vs. Indirect Investment

As an investor, you have two choices:

1. Direct Investment: You can invest directly in the main fund, where your money is managed and generates returns.
2. Indirect Investment: Alternatively, you can invest in the Fund of Funds, which then invests in the main fund on your behalf.

Why Choose a Fund of Funds?

While it might seem simpler to invest directly in the main fund, there are several reasons why investors might opt for a Fund of Funds instead:

• Diversification: The FoF can spread its investments across multiple funds—real estate, venture capital, private equity, and more—offering greater diversification.
• Negotiated Fees: The FoF often brings in significant capital, which gives it leverage to negotiate lower fees or better terms with the funds it invests in. For instance, the FoF manager might negotiate a lower acquisition fee, which can result in higher returns for its investors.
• Lower Minimum Investment: Many FoFs offer a lower minimum investment threshold, making it more accessible to a broader range of investors.

Conclusion: Why Consider a Fund of Funds?

So, what is a Fund of Funds? It’s an investment vehicle that leverages its position to offer diversification, reduced fees, and lower minimum investment requirements. This structure can be an attractive option for both fund managers and investors looking for broader exposure and better terms.

For a deeper dive into this topic, watch my video. If you’re interested in more content like this, visit the Fund Launch Blog! Ready to start or scale your own Fund of Funds? Head over to Fund Launch!

Thanks for reading,‍

Bridger Pennington

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_{DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.}