Fund of Funds (FoF)
Definition
An investment vehicle that allocates capital to a portfolio of private equity, venture capital, or hedge fund managers rather than investing directly in companies. Fund of funds provide diversification across managers, strategies, and vintages, though they involve an additional layer of management fees and carried interest.
Complementary Terms
Concepts that frequently appear alongside Fund of Funds (FoF) in practice.
A private equity or venture capital fund that continues to operate beyond its intended life, holding illiquid portfolio companies that have neither achieved exit nor been written off. Zombie funds present governance challenges, carry ongoing management costs, and often reflect unrealised intangible asset potential that has failed to convert into realisable value.
The year in which a private equity or venture capital fund makes its first investment or its final close. Vintage year is used to group and compare fund performance because macroeconomic conditions at the time of investment significantly influence returns.
The managing entity of a private equity or venture capital fund, responsible for making investment decisions, managing portfolio companies, and generating returns for investors. GPs typically earn management fees and carried interest.
A direct investment made by a limited partner alongside a private equity or venture capital fund in a specific portfolio company. Co-investments allow LPs to increase exposure to particular deals, typically at reduced or no management fees and carry, while giving the GP additional capital for larger transactions.
The share of investment profits that a fund manager (general partner) receives as performance-based compensation, typically 20% of profits above a hurdle rate. Carry is the primary financial incentive for venture capital and private equity fund managers.
The pattern of returns typically experienced by private equity and venture capital funds, where early years show negative returns (due to fees and unrealised investments) before turning positive as portfolio companies mature and generate exits. The shape of a fund's J-curve reflects its deployment pace and value creation speed.
An investor in a private equity or venture capital fund who contributes capital but does not participate in day-to-day investment management. LPs include pension funds, endowments, family offices, sovereign wealth funds, and high-net-worth individuals.
An annual fee charged by a fund manager (general partner) to cover operational costs, typically calculated as 1.5% to 2.5% of committed capital during the investment period and assets under management thereafter. Management fees are separate from carried interest.
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