A fund of funds is a method of investing in which our funds are invested in funds instead of being invested directly in bonds, stocks, a particular business or other securities. Which is a combination of portfolios from other investments. The main strategy of this type of investment is based on two main goals:

  1. As much diversification as possible
  2. Optimal asset allocation (so that investors face far fewer risks than direct investment).

A portfolio manager, using his knowledge and expertise in stock portfolio optimization, seeks to select the best funds based on their profitability and past performance for investment. Depending on the portfolio manager’s expertise, the fund has the potential to make more than average returns. FOF can also be designed in two ways, limited or unrestricted. In the first or limited type, it can only invest in funds managed by the same company, while in the unrestricted type, this is not the case. The first FOF was founded in 1962 by Bernie Cronfeld.

In fact, there are several types of fundraisers, each of which invests in a specific type of collective investment scheme, including the following:

  1. mutual fund FOF
  2. hedge fund FOF
  3. private equity FOF
  4. investment trust FOF
  5. VC FOF

At present, there are different types of investment funds operating in Iran, which are more common in stocks and fixed income. Last year, a new type of fund called fund in fund was approved by the stock exchange organization and the conditions for establishment They were notified

This fund is one of the examples of investment funds subject to paragraph 20 of Article 1 of the Securities Market Law and paragraph H of the Law on Development of New Financial Instruments and Institutions.

How to invest in this fund is like other investment funds and can operate in two structures that can be traded and based on the issuance of cancellation.

Bold investment funds

It may be best to first define the concept of venture capital funds before dealing with hedge funds; Venture capital, also known as “bold investment” or “entrepreneurial investment”, refers to the financing of startups and start-ups that are likely to grow rapidly. It should be noted that this type of investment has a lot of risk according to the basic rule of risk due to its high return potential.

Now that we are familiar with the concept of venture capital, it is better to go to the introduction of venture capital funds or VCs; VCs can be considered as financial intermediaries between major investment institutions and small companies that are growing rapidly in the direction of an innovation-driven process.

The innovative process in which new and innovative ideas lead to economic growth is the most important economic trend of the last two centuries. The venture capital industry and venture capital funds (VCs) are at the core of an important part of this process.

In addition to investing in start-ups, venture capital funds participate in other activities such as participating in corporate governance, assessing the risks of start-ups and accepting the risks of the company, and hope to achieve their long-term goals. They accept large risks, although it should be noted that these funds evaluate as much as possible before accepting startups and invest only in businesses that have a high probability of profitability.

One of the main reasons for paying attention to venture capital funds is that they turn fundamentally innovative ideas into key components of economic growth. Apple’s development is an example of these fundamental changes related to VCs. In 1978, two business partners, Sequoia and Matrix, two VC funds, invested about $ 1.2 million in Apple, which was worth about $ 3 million, and now the company is worth more than $ 1,000 billion. it is arrived.

The different role of VC funds as financial intermediaries is expressed in the specific relationship between them and the institutional investors who provide the most capital. While most financial intermediation (such as the transfer of savings to stock and debt markets) is done by employees and institutional investors, VC funds are the arm of intermediation for which contracts are made with institutional investors. Is.

Now that we are familiar with concepts such as hedge funds, venture capital and hedge funds, we can define hedge funds; A fund that invests in a number of VCs (venture capital funds) is called a VC fund. Since investing in just one VC is very risky (given the nature of VCs and their risk-taking), investing in multiple VCs provides relatively good diversification, which is It reduces the risk of investing and investors can invest in these ultra-funds more safely.

FOF Features

Fund of Funds Features

Investing in a collective project and several venture capital funds can lead to increased diversification compared to small and direct investment in a startup or VC. According to modern portfolio theory, the advantage of diversification in reducing volatility of stocks is at the same time keeping the average return constant. However, this advantage is sometimes lost with increasing transaction costs at various levels of the fund.

Management costs in the FOF method are often higher than traditional investment costs (direct trading of stocks, bonds, etc.) due to the calculation of stock portfolio management costs in the traditional method in fixed assets. Base assets are also a term used in derivatives trading. A derivative is a financial instrument whose price and value are derived from another asset. Fixed assets are also usually one of the types of financial instruments such as stocks, commodities, currencies and indices, based on which the price of derivative instruments is determined. Historically, FOF funds have shown that the costs of this strategy do not necessarily include the costs of the underlying assets.

Asset allocation funds

The structure of Mutual Funds can be useful for ETFs or Mutual Funds as well as Mutual Funds. In short, a mutual fund is a fund in which funds received from investors are invested in various markets, including stocks, securities, bonds, and other monetary and financial instruments. In contrast, ETFs are a relatively new phenomenon compared to mutual funds, representing a share of ownership of a single investment credit, or UIT, which holds stock of securities, bonds, currencies, and commodities.

IShares, for example, uses the FOF model of tradable funds, while US investment firm Vanguard uses the FOF model of mutual funds.

Targeted investment funds

These mutual funds are the same as before, except that the allocation of assets is time-based and has a time purpose. It should also be noted that both IShares and Vanguard, mentioned above, also benefit from this strategy, except that they have a time limit for investment, which clearly prevents rework.

Private Mutual Funds

According to Preqin in 2006, funds invested in private equity funds (FOFs, secondary investments, etc.) account for about 14% of all funds invested in the market.

FOF benefits

#1 Taxes:

If you are looking to revalue your portfolio, you can also take a look at investing in overseas funds. By law, these funds have some tax breaks that make investing in them more attractive to customers.

#2 Easy to manage:

You do not need to be familiar with the deep concepts of the capital market to understand and see your profit or loss, and with only one number (NAV) you can understand the status of your portfolio. It should be noted that NAV is the net asset value of the company, which is calculated per share. We know that the assets of each fund are valued on a daily basis, and if we subtract the liabilities of the fund, which usually include debts to buy shares to brokerages and debts to the fund, the net asset value of the fund is obtained, which can be divided by the number of units of the fund. Get the net of each unit or NAV of the fund.

#3 Professional Fund Management Services:

Investing in Mutual Funds allows you to invest in advanced mutual funds that you have not previously been able to invest individually and enjoy its benefits.

#4 Having Professional Investment Managers:

Investors in mutual funds are confident that they are investing in a fund with professional executives and that their money is not in the hands of inexperienced and crude individuals.