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If you couldn’t tell I am an advocate for funds…
I believe they are an amazing business that anyone can gain from.
There are a lot of stereotypes of funds and of the people who run them.
My goal with my course and blog is to show you why those stereotypes aren’t as true as you would think,
And that there are many different ways of running a fund besides “picking all the right stocks” or being the “Wolf of Wall Street”.
One of my favorite fund models actually doesn’t even make you have to pick individual stocks, real estate, or businesses.
It’s called a Fund of Funds…
Here’s how it works.
A Fund of Funds
If you have read my articles or watched my YouTube channel you probably know the basics of a fund by now…
You have a General Partnership who invests capital raised from investors by using a Limited Partnership.
In a regular hedge fund, real estate fund, or private equity fund the fund manager would take this money and invest it into individuals stocks, properties, or businesses.
A Fund of Funds actually takes a step back on this model.
Instead of investing in individual assets, a Fund of Funds invests into other funds.
This means that instead of picking single stocks or properties you would be picking funds you believe in.
Now there are a few differences between a regular fund and a Fund of Funds.
A regular fund model might charge a 2/20,
Or a 2% management fee and a 20% of profits fee.
So if you are investing in these funds do you also charge those same fees?
That would effectively double the amount of fees for investors.
Why would they go to you instead of going to the other funds themselves?
Some of the biggest answers to this are investor capital requirements and diversification.
Imagine one of the funds your Fund of Funds was going to invest in was a Venture Capital fund with a 41% expected return.
But this fund also requires a minimun investment of $2 million.
And Joe the individual investor only has $2 million to invest.
What does he do?
Joe doesn’t want to put all of his eggs in one basket.
Joe would go to your fund with their $2 million dollars because they know you are invested in that Venture Fund as well as a Private Equity Fund and two Real Estate Funds.
This gives Joe exposure to higher risk, higher reward funds like that VC Fund as well as diversifying his money.
Those benefits are great but what do investors do about the extra fees of each fund?
The answer to this questions is simple but not easy.
It honestly depends on what the fees and expected returns of the funds you are invested in charge and expect.
If they have high expected returns then you could probably get away with a 2/20 in your fund.
If their fees are higher or the expected return is lower then maybe your fund will only charge a 1% management fee and a 10% fee on profits.
The biggest thing it to make sure you disclose this to your investors and make sure they understand they will be getting charged multiple fees.
Now there are other benefits to a Fund of Funds like discounts and hands off investing.
Typically once a Fund of Funds is set up it becomes pretty low maintenance.
You just need to make sure your books are in order every quarter.
I love the Fund of Funds model because of its multiple benefits. More peace of mind, low maintenance, great returns, more time for relationships, and more!
Conclusion
A Fund of Funds os a great way to be able to build wealth.
There are many benefits to a Fund of Funds like diversification, its generally hands off, and good demand.
What are some other benefits you can think of when it comes to a Fund of Funds?
Let me know below or join our free Facebook group!
Take Care,
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
