Funds of funds and investment platforms give individuals access to managers and diversification they could not reach directly, in exchange for fees charged on top of the underlying funds' own fees.
11 min read · Level 5
A second fee layer is worth paying for access you genuinely cannot get and diversification you genuinely cannot build, and for nothing else. I think the honest test is whether you could name three managers you would commit to directly and actually get into their funds. If you could, the layer is an expensive convenience; if you could not, it may be the only sensible way to hold the asset class at all.
A fund of funds invests in other funds. Platforms offer similar access, sometimes through feeder vehicles that pool individuals into a single commitment.
What they provide What they cost Access to managers with high minimums an extra management fee Diversification across managers and vintages an extra layer of carry Manager selection and monitoring less direct relationship with underlying managers Lower minimum commitments additional administration
The second fee layer worked through. An LP commits 100 to a fund of funds charging 1% a year for ten years and 10% carry, investing in underlying funds that deliver a 2.12x net return on the capital they receive.
Fund of funds fees: 1% x 100 x 10 years 10 Capital invested in underlying funds 90 Underlying net return at 2.12x 190.8 Profit over the 100 committed 90.8 Fund of funds carry at 10% 9.1 LP receives 181.7 = about 1.82x
The underlying managers delivered 2.12x net. The LP received about 1.82x. The second layer cost roughly 0.3x of the commitment.
Whether that is worth paying depends on the alternative. If the fund of funds provides access to managers genuinely closed to individuals, and the individual would otherwise hold one or two funds, the diversification and selection may be worth more than the fees. If it holds managers an individual could reach directly, it is an expensive way to buy what they already had.
Because for many individuals this is the only realistic route into institutional-quality private funds, and the fee arithmetic decides whether that access is worth having.
It also affects expectations. A private markets allocation accessed through two fee layers needs the underlying managers to perform considerably better than public markets simply to match them after costs.
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Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: U.S. SEC - Investor.gov, private placements; FINRA - investor information; UK FCA - information for consumers
Two routes for an individual with 200,000 to allocate to venture.
Route Exposure Fee layers Practical result Two direct fund commitments 2 managers, 1 vintage one concentrated in two managers Fund of funds 15 to 25 managers, 3 vintages two diversified, about 0.3x of commitment in extra cost
The direct route is cheaper and far more concentrated: two manager choices determine the outcome. The fund of funds spreads that risk across many managers and several vintages at a measurable cost. For an investor who cannot assess managers confidently, paying for selection and diversification may be reasonable; for one with genuine access and judgement, it is not.
Comparing a fund of funds with direct fund commitments on fees alone, without accounting for the concentration risk of choosing only one or two managers.
Add the fund of funds fees and carry to the underlying funds' fees and carry over the full life.
Ask which underlying managers are included and whether you could reach them directly.
Assess how much diversification the structure actually provides.
Weigh the fee cost against the risk of selecting only one or two managers yourself.
Confirm you qualify and understand any redemption restrictions in platform structures.
When considering access to private funds through a fund of funds, feeder or platform.
When you have genuine access to strong managers directly and the capacity to commit to several across vintages. In that case the second layer buys little.
A number of platforms and feeder structures have reduced the minimum commitment required to access private equity and venture funds for individual investors, typically adding their own fees and, in some cases, carried interest on top of the underlying fund's terms.
Lower minimums are real access, and they come with costs that must be added to the underlying fund's fees before comparing returns.
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