What Is a Fund of Funds?
A fund of funds (FoF) is a fund whose portfolio consists of stakes in other funds instead of direct investments in companies, stocks, or bonds. A private equity fund of funds, for example, might commit capital to fifteen or twenty different buyout and venture funds, giving its investors exposure to hundreds of underlying companies through a single commitment.
The model exists because private markets are hard to access: top-tier funds have high minimums, limited capacity, and often accept only established relationships. A fund of funds aggregates smaller investors' capital, performs manager due diligence, and secures allocations that those investors could not obtain on their own.
How the Economics Work
The defining trade-off is double fees. Investors pay the fund of funds its own management fee, often around 1% plus a small carry of 5% to 10%, on top of the 2-and-20 charged by each underlying fund. Both layers must be overcome before the investor earns a net return, which puts real pressure on manager selection.
Modern fund of funds firms have adapted by adding lower-fee services: co-investments alongside GPs (often at no fee), secondaries, and separately managed accounts for large clients. Firms like HarbourVest, Hamilton Lane, and StepStone have evolved from pure FoF managers into broad private markets solutions platforms.
Example
Imagine a $500 million private equity fund of funds that commits $25 million to each of twenty underlying funds across buyout, growth, and venture strategies. If the underlying funds collectively generate a 2.0x gross multiple, fees at both layers might reduce the investor's net outcome to roughly 1.6x to 1.7x.
For a small pension with a $50 million private equity budget, that diversified 1.65x net result across twenty managers may still beat what it could achieve picking two or three funds on its own, which is the core value proposition.
Why It Matters
Funds of funds are a major gateway through which smaller institutions and, increasingly, wealthy individuals access private markets, and they are significant LPs in many first-time and emerging manager funds. They also anchor the secondaries market, buying existing LP stakes and providing liquidity in an otherwise illiquid asset class.
In interviews for private markets roles, the fund of funds model is a clean way to test whether a candidate understands layered fee drag and the GP/LP structure, so be ready to walk through the double-fee math.
