Fund of One is an investment structure that has become popular in the fund of funds world, in which the investor, in this case the FoF, is the sole investor in a specfic vehicle or fund, offering it greater influence over the manager. Such a structure allows the FoF to negotiate better fee structures and offer its investors more customized exposure.
Q. This is a new structure in the investment world… but how does it work?
A. It is what it sounds like, an investment vehicle with only one investor. It’s used in various circumstances, but probably the most common is in the fund of fund world, where instead funds of funds are often insisting on the structure when they invest with an underlying fund manager. So, instead of just investing in a target fund as a regular limited partner, the Fund of Funds goes through a “Fund of One.”
Q. And what’s the advantage of that?
A. It gives the FoF a chance to customize the mandate, and get the fund manager to increase allocations to a specific asset class, or to avoid it altogether. That helps the fund of fund do a better job of meeting its own allocation and non-correlation goals. It also helps them avoid style drift from their underlying managers, and maybe negotiate better fee structures… definitely important, as FoF investors got tired of paying multiple levels of fees.
Q. Well, that’s a good point, right? FoF have lost some popularity over the past few years because of fees in particular…
A. Right, so the arguments to go into them have become more narrow. The best ones get you into funds that you can’t get into otherwise: niche strategies are a great reason to go into a FoF. Also, FoFs are sometimes really the only way in to some of the top PE and VC funds.
Q. OK, so that’s the Fund of Funds story. Where else to you see these new “Funds of One”?
A. They’re also sort of a halfway house for high net worth investors that are somewhere between separately managed accounts and true pooled vehicles. What happens is that an advisor will create a feeder fund for a HNW, and use that as the investor in a series of private placements – a mix and match strategy, but with much less administrative burden for both the investor and the advisor. So a fund of one makes customization fairly easy for a HNW looking at private placement opportunities.