As their name implies, Funds-of-Funds invest in other funds – typically Venture Capital and/or Private Equity funds. By investing in many funds, each with their own portfolio, Funds-of-Funds offer greater diversification than individual funds might.
However, the underlying funds could have overlapping investments, reducing the apparent diversification and potentially causing overweighting of some assets or asset classes. Some Funds-of-Funds invest solely in blockchain-specific VC and PE funds; others invest in funds that are more broadly diversified – limiting their exposure to blockchain investments.
Though Funds-of-Funds often require a lower minimum investment than stand-alone VC and PE Funds, there are often two layers of fees: for the fund itself and for the funds that the fund invests in. Investors choosing Funds-of-Funds believe the fees are justified by the low investment amount, the extensive diversification provided by the fund and the convenience of owning one fund instead of buying funds separately.