The Funds Of Funds Model
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You may have seen or invested in a fund of funds before possibly without knowing it. A fund of fund allows investors certain flexibility with their investments, typically in exchange for slightly higher costs. In this episode we’ll break down the fund of fund model and lay out its pros and cons.
Key Points:
1.[00:49-01:19 Definition of Fund of Funds:
A fund of funds is a sub fund that invests in another fund. It allows investors to combine their investments with others, providing flexibility and potentially better terms from the operator.
2.[3:35-5:26] Pros of Investing in a Fund of Funds:
a. Better Returns: Investors historically see better top-line returns due to leveraging a larger investment pool.
b. Flexible Terms: The fund of funds may have lower minimum investment requirements compared to the underlying funds, providing more accessibility for investors.
c. Double Layer of Due Diligence: With both the operator and the fund of funds team conducting due diligence, investors benefit from a dual assessment of the investment opportunity.
3.[05:26-7:09] Cons of Investing in a Fund of Funds:
a. Additional Fees: The fund of funds model involves additional fees, as both the operator and the fund of funds team will charge for their services.
b. Minimum Investment Risk: If the fund of funds fails to meet its minimum investment target, it may affect the terms and returns for investors.
Overall, investing in a fund of funds can offer the advantage of higher returns, flexible terms, and additional due diligence. However, investors need to carefully assess the associated fees and ensure that the fund of funds will meet its minimum investment target to honor the agreed terms.
