In practice
Funds of funds are usually organized as limited partnerships with their own LPA, and often sit in the same strategy or region, such as venture or buyout. Many also buy secondaries or make co-investments alongside the underlying managers. Fee levels and carry vary and are often lower than a direct fund’s. Not to be confused with a feeder fund, which invests in one fund.
An example
Round numbers, not a real fundSay a fund of funds raises $500 million and commits $50 million each to ten buyout funds. Investors in it pay its fee on top of what each underlying fund charges.
Why it matters
It gives smaller investors access to many managers, at the price of paying two sets of fees.
A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.