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The strategic importance of investment structures

In a context marked by the growing sophistication of asset allocation strategies, an in-depth understanding of specialised investment vehicles such as feeder funds and funds of funds is essential. Initially reserved for institutional investors, these structures are now prized by sophisticated private investors. Financial advisers must therefore master these concepts precisely to respond effectively to demanding clients.

The European regulatory evolution, notably through the UCITS and AIFMD directives, has clarified the environment for these funds and imposed greater transparency. A thorough knowledge of regulatory and structural specificities today makes it possible to offer private investors investment solutions previously reserved for institutions.

Precise definitions of the concepts: feeder fund and fund of funds

What is a feeder fund?

A feeder fund is an investment vehicle that invests at least 85% of its assets in a single fund called the “master fund.” Its purpose is to replicate in full the strategy of this master fund. The master fund is often managed by a specialised firm with a precise or diversified strategy.

The UCITS V directive requires feeder funds to provide full transparency on their strategy, risks, and fees. ESMA (the European Securities and Markets Authority) specifies the reporting obligations to investors, thus ensuring clear communication regarding the specific nature of the feeder fund.

The feeder fund: a terminology to clarify

The term “feeder fund” comes from the Anglo-Saxon world and refers to the concept of a fonds nourricier. In practice, these two terms are therefore generally considered synonymous. This equivalence is widely accepted by European regulators and industry professionals.

The fund of funds: definition and operation

A fund of funds (FoF) invests exclusively in several different funds, thereby creating immediate diversification. Unlike the feeder fund, the fund of funds does not depend on a single master fund but spreads its assets among several managers and investment strategies.

Differentiation between feeder fund and fund of funds

Nature of the underlying portfolios

The essential difference between a feeder fund and a fund of funds lies in their composition. The feeder fund invests entirely in a single master fund, whereas the fund of funds is composed of several funds.

Management strategies: feeder fund versus fund of funds

A feeder is characterised by a passive management approach, fully aligned with that of the master fund, since its very essence lies in being exposed to a single strategy selected following a long due diligence. The principle here is to offer a pure building block to Financial Advisers so that they can build their clients’ portfolios according to their specific needs.

The fund of funds, by contrast, is composed of a selection of funds according to a defined strategy: this may be a diversified selection that could provide exposure to different types of private assets, for example (private equity, private debt, and infrastructure), or select different managers within the same strategy. In this case one might think of a “pure” strategy such as Capital Transmission (LBO). The manager rigorously selects each underlying fund according to the orientation of the fund of funds that has been defined and validates the complementarity between the different funds.

Points of attention for financial advisers

To integrate these structures effectively into wealth strategies, several aspects must be rigorously analysed:

Specific due diligence

• For the feeder fund, in-depth analysis of the master fund (performance, management team, ESG criteria).
• For the fund of funds, assessment of the underlying funds (track record, actual diversification, correlations) where possible.

Regulatory transparency

Systematically verify regulatory reporting to avoid any operational or compliance risk.

Control of indirect fees

Clearly identify and communicate to investors the reality of potential indirect fees.

Strategic use of feeder funds and funds of funds

Why use a feeder fund?

The feeder fund offers private investors privileged access to private funds usually reserved for institutions, while allowing them to benefit from the master fund’s expert management. It is an interesting lever for targeted diversification and access to exclusive strategies. Finally, it is a perfect tool when the Financial Adviser has to build a tailor-made allocation for a wealth client.

Why choose a fund of funds?

The fund of funds is particularly suited to investors seeking immediate turnkey diversification. This approach facilitates exposure to a wide range of strategies and/or specialised managers.

FAQ

How do you choose between a feeder fund and a fund of funds?

The choice depends on the end investor’s profile and wealth objectives. The feeder fund is better suited to a precise objective aligned with a single fund within the framework of tailor-made portfolio construction, whereas the fund of funds is suited to diversification in a single solution.

Are fees always higher in a fund of funds?

Not necessarily, but the fund of funds often involves a layering of fees. In-depth analysis is essential to avoid excessive costs.

In conclusion, feeder funds and funds of funds are now essential tools for financial advisers to access the world of private assets. By mastering their specificities and integrating them judiciously into a wealth allocation, the adviser is able to offer clients a diversification solution that is flexible and tailored to their expectations. A rigorous and well-informed approach remains the key to a successful strategy.