Wall Street’s principal product for retail investors these days is the “fund of funds.” As the name suggests, it’s a fund which owns pieces of a number of other funds with similar investment objectives. Recent examples I’ve seen include a hedge fund fund of funds, a private equity fund of funds and an international debt fund of funds.

 

Your broker will extol the advantages of a fund of funds, such as access to funds you couldn’t buy individually because their minimums are too high or you’re reducing your risk in a riskier investment class. Like the funds they invest in, funds of funds often have fairly hefty minimums and are illiquid. It may take you a month to three to get your money out and you can’t easily make addition investments or small withdrawals. The way I see you’re paying double fees – one to the mangers of the real funds and a second to the fund of funds manager (who may just happen to work for the brokerage house who is trying to sell you the product). AND, buying a group of similar funds only ensures that your return will regress to the mean. (Can you say: super expensive index fund?)

 

You can participate in most investments, including intentional debt (there are even a few private equity funds) through mutual funds.  Mutual funds are cheaper, have similar or better performance (this requires a little work on your part or a good adviser), modest investment minimums and offer daily liquidity. What’s wrong with this picture? The broker selling you the product makes less money then if you buy a fund of funds. (Funds of funds may have their place in your portfolio if you participate in hedge funds, private equity and other such investments and buying individual funds isn’t right for you, but there aren’t many of “you” out there.) 

 

Make intelligent investment decisions: buy mutual funds.