Raising Capital - New Strategies for Fund Managers By Ferd Niemann IV

In the ever-evolving landscape of real estate and private equity investing, savvy investors are always hunting for innovative strategies to grow their portfolios. Enter the Fund of Funds (“FoF”) model—a rising star in the investment world. Think of it as an investment “super fund” where a managing sponsor gathers capital from multiple investors and deploys it across a curated selection of other funds, rather than directly in individual assets. This structure offers a one-stop shop for diversification, access to top-tier managers, and streamlined investing—but it is not without its challenges. Whether you’re a seasoned investor or exploring new opportunities, understanding the pros and cons of the FoF model is crucial to deciding if it fits your strategy. 

What is a Fund of Funds (FoF)? At its core, a FoF pools capital from investors—like high-networth individuals or institutional investors—and allocates it across a variety of underlying funds. Rather than directly owning assets, you gain exposure to a portfolio managed by multiple fund managers, who, in turn, invest in specific deals, assets, or markets. This layered structure brings built-in diversification and professional oversight, but it also introduces unique considerations. Let’s explore the upsides and trade-offs to see if this model aligns with your investment goals. 

The Pros: What Makes the FoF Model Shine 

1. Instant and Broad Diversification 

Diversification is the name of the game in the Fund of Funds model. Instead of putting all your eggs in one basket, your investment spans across multiple funds, geographies, and asset classes without having to directly manage each investment. This approach helps cushion your portfolio against downturns in specific markets or sectors, offering a layer of protection for long-term growth. 

2. Access to Elite Fund Managers and Opportunities 

The Fund of Funds model provides a gateway to top-tier managers and exclusive investment opportunities often out of reach for individual investors. These managers bring expertise, track records, and connections to high-performing assets. Simply put, you’re investing in expertise and opportunity that might otherwise be off-limits. 

3. Lower Minimum Investment Hurdles 

Premium funds often require substantial capital commitments— an entry barrier for many investors. A Fund of Funds democratizes this access, allowing you to tap into high-caliber funds with a smaller upfront investment. It’s a more accessible path to premium portfolios without breaking the bank. 

4. Simplified Management for Passive Investors 

If you prefer a hands-off approach, the Fund of Funds model is a dream come true. Instead of managing relationships with multiple fund managers and dealing with scattered reports and distributions, you get a single point of contact. The sponsor handles the heavy lifting, from communication to portfolio management, so you can focus on the big picture. 

The Cons: What to Watch Out For 

1. Double-Layered Fees Can Eat Into Returns 

The biggest downside of the Fund of Funds model is its fee structure. You’ll pay management and performance fees not only to the FoF sponsor but also to each underlying fund. These stacked fees can significantly chip away at your net returns, making it critical to assess if the potential gains outweigh the costs. 

2. Limited Control Over Investment Decisions 

When you invest in a Fund of Funds, you’re entrusting the sponsor with all allocation decisions. While this simplifies your role, it also means less transparency and influence over where your money goes. If you’re someone who likes to have a say in every investment, this hands-off model may not suit your style.  

3. Risk of Diluted Returns 

Diversification is a double-edged sword. While it reduces risk, it can also dilute returns. A strong performance in one fund might be offset by underperformance in another, leading to a more moderate overall return. For investors chasing highgrowth opportunities, this broad approach might feel limiting. 

4. Extra Due Diligence is Required 

With a Fund of Funds, due diligence doesn’t stop at the sponsor. You’ll also need to vet the underlying fund managers they select. Ensuring that the sponsor has the expertise and rigor to evaluate these managers is critical. Without this trust, you risk exposure to poorly performing or mismanaged funds. Is the Fund of Funds Model Right for You? The Fund of Funds model offers a unique blend of diversification, access to elite managers, and convenience for passive investors. It’s an appealing option for those looking to simplify their portfolios while gaining exposure to a variety of assets and markets. However, it’s not a one-size-fits-all solution. If high fees, diluted returns, or lack of control are dealbreakers, you might want to explore other options. Ultimately, the decision boils down to your investment style, financial goals, and risk tolerance. Potential investors should carefully weigh the pros and cons of the Fund of Funds model, conduct thorough due diligence on the managing sponsor and underlying funds, and consider how this approach aligns with their overall financial goals and risk tolerance. As with any investment strategy, thorough research and a clear understanding of the trade-offs are essential. The Fund of Funds model could be the next big step in your investment journey—or simply another tool in your financial toolkit. Before diving in, ask yourself: • Do I value convenience and diversification over hands-on control? • Am I comfortable with the fee structures? • Do I trust the sponsor to make sound investment decisions?

Fred E. Niemann IV, Partner at The MHP Law Firm, afirm that specializes in representing community owners, sellers and buyers in all aspects of MHC transactions and management. Mr. Niemann hosts The Mobile Home Park Lawyer Podcast which focuses on issues associated with owning, buying/selling, and operating MHCs. In addition, Mr. Niemann has owned and operated 24 MHCs totaling over 1,600 sites