A fund of funds (FoF) is an investment fund that holds a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. This type of investment is also known as multi-manager investment. Fund of funds can be classified into: Mutual fund FoF and Hedge fund FoF.
Mutual fund FoF:
A Mutual fund FoF invests in other mutual funds. Just as a mutual fund
invests in a number of different securities, a fund of funds holds
shares of many different mutual funds.
Hedge fund FoF:
A Hedge fund FoF invests in a portfolio of different hedge funds to
provide broad exposure to the hedge fund industry and to diversify the
risks associated with a single investment fund.
Pros & Cons of Fund of funds
Fund of funds are designed to achieve greater diversification than
traditional mutual funds. But on the flipside, expense fees on fund of
funds are typically higher than those on regular funds because they
include part of the expense fees charged by the underlying funds. Also,
since a fund of funds buys many different funds which themselves invest
in many different stocks, it is possible for the fund of funds to own
the same stock through several different funds and it can be difficult
to keep track of the overall holdings.