What are 'fund-of-funds'?

'Fund-of-funds' are specifically designed investment vehicles that allocate capital into a variety of other investment funds, particularly private equity funds. This strategy allows investors to gain diversified exposure across multiple underlying funds, which may target various investment strategies, sectors, or regions, thereby spreading risk.

By investing in a fund-of-funds, an investor can access a broader range of managers and strategies than they might be able to through direct investments. This is particularly advantageous for investors seeking to mitigate risks associated with investing in a single fund or investment vehicle. Additionally, fund-of-funds often have experienced management teams that perform extensive due diligence on the underlying funds, which adds another layer of expertise in the investment decision-making process.

In contrast, other options do not accurately capture the essence of what fund-of-funds are. Investment funds that hold cash reserves for emergencies focus on liquidity management rather than diversifying among other funds. Funds that invest directly in public companies are typically not classified as fund-of-funds, as they solely invest in equities rather than other funds. Likewise, funds that focus solely on acquiring real estate pertain to a specific asset class and do not encompass the multi-fund investment structure that defines a fund-of-funds.