Advantages having of Funds of Funds (FOF)
A Funds of Funds (FOF) is an investment product made up of various Hedge Funds (HF). They are often used by investors, with limited ability to diversify within the HF arena. In simple words mutual funds that make investments in other funds are called FOF.
The difference with FOF is that, when you buy funds yourself, you buy them individually and track them separately, while when you buy a Funds of Funds (FOF), you would be holding just one fund, which in turn would be holding other mutual funds inside it.
As a FOF holds many funds inside it however, it will not deliver performance better than the single best performing fund that it has invested in. The return of a FOF will always be closer to the weighted average returns of the funds it has invested in, quite like the return of your own portfolio of funds.
HF’s generally tend to make their own asset class, which are many a times difficult to see through. The FOF serves as an investor’s proxy that ensures the proper oversight into the HF’s in its portfolio, as well as performs professional diligence.
Many such FOFs tend to have a kind of formal process, which includes conducting background checks before appointing its new managers. Apart from the search conducted within the securities, this job also includes researching applicant’s backgrounds, verifying credentials and checking references provided by the HF manager, who has applied for the FOF.
HF typically tends to have high lower investment levels, which restricts the investors ability to diversify their portfolios, within the allocated amount for HF. Having FOF helps investors with limited capital, access a number of fund returns with just a single investment at the same time it also allows quick diversification, which is essential for success in the financial world. The fund selection process helps provide greater stability of returns by spreading their assets over a broad range of strategies.