The due diligence of the FOFs apparently did not include asking why Madoff was not making this charge for his services. It became clear that a motivation for this was the lack of fees by Madoff, which gave the illusion that the FOF was performing well. The due diligence and safety of investing in FOFs has come under question as a result of the Bernie Madoff investment scandal, where many FOFs put substantial investments into the scheme. Pension funds, endowments and other institutions often invest in funds of hedge funds for part or all of their "alternative asset" programs, i.e., investments other than traditional stock and bond holdings. However, some FOFs waive the second level of fees (the FOF fee) so that investors only pay the expenses of the underlying mutual funds. As of January 2007, the SEC began requiring that these fees be disclosed in a line called ' Acquired Fund Fees and Expenses' (AFFE)." Īfter allocation of the levels of fees payable and taxation, returns on FOF investments will generally be lower than what single-manager funds can yield. In its article on Funds of Funds, Investopedia notes that, "Historically, a fund of funds showed an expense figure that didn't always include the fees of the underlying funds. Management fees for FOFs are typically higher than those on traditional investment funds because they include the management fees charged by the underlying funds. However, this is countered by the increased fees paid both at FOF level and at the level of the underlying investment fund. According to modern portfolio theory, the benefit of diversification can be the reduction of volatility while maintaining average returns. Investing in a fund of funds may achieve greater diversification. Investing in a collective investment scheme may increase diversity compared with a small investor holding a smaller range of securities directly. It went bankrupt after being looted by Robert Vesco. The original Fund of Funds was created by Bernie Cornfeld in 1962. There are different types of FOF, each investing in a different type of collective investment scheme (typically one type per FOF), for example a mutual fund FOF, a hedge fund FOF, a private-equity FOF, or an investment trust FOF. A fund of funds may be "fettered", meaning that it invests only in funds managed by the same investment company, or "unfettered", meaning that it can invest in external funds run by other managers. This type of investing is often referred to as multi-manager investment. JSTOR ( June 2008) ( Learn how and when to remove this template message)Ī "fund of funds" ( FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities.Unsourced material may be challenged and removed. Please help improve this article by adding citations to reliable sources. Venture capital funds are private equity investment vehicles that seek to invest in firms that have high-risk/high-return profiles, based on a company's size, assets, and stage of product development.This article needs additional citations for verification. Venture capital ( VC) is a type of equity financing that gives entrepreneurial or other small companies the ability to raise funding before they have begun operations or started earning revenues or profits. Investors in a VC fund will earn a return when a portfolio company exits, either through an IPO, merger, or acquisition.Venture capital funds are used as seed money or "venture capital" by new firms seeking accelerated growth, often in high-tech or emerging industries.As a result, these are only available to sophisticated investors that can handle losses, along with illiquidity and long investment horizons Hedge funds target high-growth firms that are also quite risky.Venture capital funds manage pooled investments in high-growth opportunities in startups and other early-stage firms.
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