Thursday, December 23, 2010

Fund of Funds

Fund of Funds refers to managed funds that invest into other funds. The advantage to investors includes the pooled funds effect, whereby the manager can bargain for lower fees given a higher FUM base, as well as diversification and asset allocation benefits. A fund-of-funds manager has the opportunity to add value in two key ways: 1. through fund manager selection i.e. researching, analyzing, and selecting the best fund managers; and 2. through asset allocation i.e. forming an optimal strategic or long term asset allocation, as well as making short term tactical or dynamic adjustments to that allocation to take advantage of market trends and relative valuations. Obviously care needs to be taken in assessing the fund-of-fund manager's skill and track record in these two aspects, as well as operational efficiency and fee structure - i.e. the manager needs to add value above and beyond the fees that they charge for their fund-of-fund products.

Synonyms:  Multi-manager, Manager of managers, Fund of hedge funds, Two-tier fund, Multi-asset fund

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