What is a fund of funds and how do I pitch one?
Short answer
A fund of funds pools investor money and spreads it across several other funds instead of buying assets directly. I count it as one of five common hedge fund investor types. To pitch one, show where your fund fits the diversified allocation they are building, and be ready for institutional level due diligence. Many sponsors talk to a securities attorney before they approach anyone.
Why a fund of funds exists
When I list the types of investors in hedge funds, the fund to fund comes last. It can be a real estate fund to fund, a long only fund to fund or a hedge fund to fund. The idea is the same in each case.
"The fund to fund is typically trying to give somebody a diversified allocation to an industry, an area or a type of asset class."
Venture capital is the classic example. You may not want to get unlucky and pick one VC fund that happens to have a bad run. So you spread money across seven or nine different VC funds. The same goes for biotech. Spreading across three biotech hedge funds may or may not be a good decision, but that is the reasoning.
There is a second reason people use them. They get into funds they could not reach directly, because the minimums are too high or the fund is closed to new investors.
This clip walks through all five types of hedge fund investors, including the fund to fund.
Summary and key takeaways from this video
What to say when you pitch one
A fund of funds is building a basket. Your pitch should make it easy to see which slot you fill. That starts with one sentence on why it matters that you exist. At Family Office Club we have reviewed 257 pitch decks and seen maybe two dozen people with a real one-liner. Half of those were horrible. So this is an easy place to stand out.
Put that sentence on the front of your deck, at the top of your one pager and in your first line of email. Then be honest about your stage. In our webinar I showed that at the startup phase you are not targeting institutional investors. You usually need 70 to 100 million, maybe a couple hundred million, before institutional money is around. Most people start with friends, family, angels and private investors, and family offices sit in the middle.
In this webinar I explain the one-liner and which investors to target at which size.
Summary and key takeaways from this video
Get the platform ready before the meeting
My friend John runs a real estate platform and told this story well. Institutions started knocking on his door and wanted to invest big money. He had no audit, no third party advisers, no correct legal counsel and no fund administrator. He had to learn all of that the hard way.
"No institutional will invest with you without an institutional platform and you have to be able to pass there."
I would expect a fund of funds to ask similar questions, so plan for them. That means audited financials, proper legal documents, a fund administrator and a clean answer on how you report. John said he spent money on these things before he could really afford it, and that it took him years to earn top ratings with third party due diligence providers.
John explains what it took to build an institutional platform and why he did it before the money came.
Summary and key takeaways from this video
One more point. Many managers talk to a securities attorney about outreach before they start.
From my book
One thing I would add is why a fund of funds exists at all for many family offices. Many do not have the resources in-house to hire and fire 10 to 15 hedge fund managers, so some hand that job to a few fund of funds. In my experience, big multifamily offices and institutions also often lack the time to diligence every deal, so they tend to prefer funds and may write bigger checks to them. When you pitch, speak to that practical need. Show how you save them work and fit a slot they cannot fill easily themselves.
"While the fund-of-funds name has seen better days, many family offices I know still invest in a few fund-of-funds because they do not have the resources in-house to hire and fire 10 to 15 hedge fund managers. Also, once you get above a $20 million or $30 million size of investment, you can negotiate more on fees and get customized fund-of-fund portfolios and advisory services included."
"Most family offices, and families, would rather put money in a direct deal than a fund. But big multifamily offices and big institutions don't have time to do diligence on every deal. They typically do prefer the funds and will write bigger checks to funds."
Facts and figures
- Venture capital fund of funds often spread money across seven or nine different VC funds to avoid one bad run.
- Family Office Club reviewed 257 pitch decks and found maybe two dozen with a real one-liner.
- John spent about $100,000 on quarterly audited financials before his fund was making a lot of money.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: 5 Types of Hedge Fund Investors, Capital Raising FAQ Webinar, How to Build a $1B Real Estate Platform | John Lettera & Richard C. Wilson. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around investor outreach rules, fund marketing language and offering documents. Do not use AI to write your own legal agreements.
Next moves
- 1Write your one-sentence reason for existing and test it on five people.
- 2List the funds of funds in your asset class and what they say they want.
- 3Check your audit, legal documents and fund administrator against institutional standards.
- 4Prepare a one pager that shows which part of a diversified allocation you fill.
- 5Consider talking through your outreach plan with a securities attorney.
More questions on this
Why would a fund of funds invest in my fund?
They are often trying to diversify across managers in one area or reach funds that are hard to access directly. Your pitch should show how you fit that goal.
How big should my fund be before I approach institutions?
In our webinar I said you usually need 70 to 100 million, maybe a couple hundred million, before institutional investors are around. Earlier on, start with friends, family, angels and private investors.
Do I need a fund administrator and audit?
John's view was that no institution will invest without an institutional platform. He also pointed to third party due diligence providers you need to be able to pass.
Related questions
- What do endowments look for in emerging fund managers?Endowments want a manager who can win over a group, not just one person.
- What is the minimum check size for institutional investors?There is no single minimum check size for institutional investors.
- How long does institutional investor due diligence usually take?There is no single number, and I would not promise one to an investor.
- What is the difference between institutional and retail capital?Institutional capital comes from organizations that invest on behalf of others, such as pensions, endowments and large managers.
Work through it with the dilution calculator. See all institutional investors resources.