Fund of Funds (FoF)

A fund of funds provides diversification across managers, strategies or vintages and access to funds that may have high minimums or be closed to new investors. It may invest in hedge funds, private equity funds, private credit funds or a mix.

Operationally, a FoF depends on the timing and quality of underlying fund reporting. Its NAV is often based on estimates from underlying managers followed by finals, and private-markets FoFs typically value holdings at the latest reported capital account balance adjusted for subsequent capital calls and distributions. Investors bear two layers of fees, which must be tracked and disclosed.

Pitfalls include stale valuations, missed underlying capital calls, unreconciled distributions, and liquidity mismatches between what the FoF offers its investors and what it can redeem from underlying funds. A clear valuation policy under the fair value hierarchy is essential.