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Guides — 16 April 2025

Feeder funds and fund of funds: definitions and fundamental differences

At a time when wealth management strategies are becoming more complex and access to unlisted assets is becoming more democratic, a good knowledge of investment vehicles such as feeder funds and funds of funds is becoming essential for financial advisors. These structures now offer private clients with intermediaries a gateway to diversified strategies. Understanding their differences, their mechanisms and their strategic uses not only enables us to better meet the expectations of wealthy clients, but also to structure effective allocations, aligned with the most demanding market standards.

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The strategic importance of investment structures

In a context characterised by increasingly sophisticated 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 popular with savvy private investors. Financial advisors must therefore have a thorough grasp of these concepts in order to respond effectively to their demanding clients.

European regulatory developments, particularly through the UCITS and AIFMD has clarified the environment of these funds and imposed greater transparency. In-depth knowledge of the regulatory and structural specificities now makes it possible to offer private investors investment solutions previously reserved for institutions.

Precise definition of concepts: feeder fund, 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 a ‘master fund’. Its purpose is to fully replicate the strategy of this master fund. The master fund is often managed by a specialised company with a specific or diversified strategy.

The UCITS V directive requires feeder funds to be fully transparent about their strategy, risks and costs. The ESMA (European Securities and Markets Authority) specifies the reporting obligations to investors, thus ensuring clear communication on the specific nature of the feeder fund.

The feeder fund: terminology to be clarified

The term ‘feeder fund’ comes from the English-speaking world and refers to the concept of a ‘fonds nourricier’ (French for ‘feeder fund’). In practice, ‘fonds nourricier’ and ‘feeder fund’ are therefore generally considered to be 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, thus creating immediate diversification. Unlike a feeder fund, a fund of funds does not depend on a single master fund, but distributes its assets among several managers and investment strategies.

Differentiation between feeder funds and funds of funds

Nature of the underlying portfolios

The main difference between a feeder fund and a fund of funds is their composition. The feeder fund invests entirely in a single master fund, while the fund of funds is made up of several funds.

Management strategies: feeder fund versus fund of funds

A feeder fund is characterised by passive management, fully aligned with that of the master fund, since this is its very essence: exposure to a single strategy, selected after a long due diligence process. The principle here is to offer a pure building block to financial advisors so that they can build their clients' portfolios according to their specific needs.

Funds of funds, on the other hand, are made up of a selection of funds according to a defined strategy: this may be a diversified selection that could expose to different types of unlisted assets, for example (private equity, private debt and infrastructure), or it may be a selection of different managers with the same strategy. In this case, we 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 he has defined and validates the complementarity between the different funds.

Points of vigilance for financial advisors

In order to effectively integrate these structures 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, evaluation of the underlying funds (history, real diversification, correlations) where possible.

Regulatory transparency

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

Control of indirect costs

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

Strategic use of feeder funds and funds of funds

Why use a feeder fund?

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

Why choose a fund of funds?

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

FAQ

What is the main difference between a feeder fund and a fund of funds?

There is no fundamental difference between a feeder fund and a fund of funds, as the two terms are synonymous. Their strategy consists of investing mainly in a single master fund.

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

The choice depends on the profile of the end investor and his or her wealth objectives. The feeder fund is better suited to a specific objective aligned with a single fund as part of a customised portfolio construction, while the fund of funds is suitable for diversification in a single solution.

Are the fees always higher in a fund of funds?

Not necessarily, but a fund of funds often involves an overlap of fees. A thorough analysis is essential to avoid excessive costs.

To conclude, feeder funds and funds of funds are now essential tools for financial advisers to access the world of unlisted companies. By mastering their specific characteristics and integrating them judiciously into a wealth allocation, the adviser is able to offer his clients a flexible diversification solution tailored to their expectations. A rigorous and informed approach remains the key to a successful strategy.

Guides

Contribution-transfer and risk capital: understanding the mechanism provided for in Article 150-0 B ter of the CGI

The contribution-sale tax mechanism, provided for in Article 150-0 B ter of the CGI, is a particularly relevant solution for company directors and private investors. This mechanism allows the deferral of capital gains tax when securities are contributed to a holding company that the contributor controls, provided that they are reinvested in the real economy. In practice, contribution-sale favours productive investments in operational companies through specialised vehicles, such as Professional Private Equity Funds (PPEF).

Guides

The guide to secondary private equity

A secondary fund is an investment vehicle specialising in the acquisition of holdings in existing private equity funds or in portfolios of unlisted assets. These transactions allow investors to sell their shares before the end of the fund's term, thus offering liquidity, while new investors gain access to more mature assets with better visibility on performance. Discover with Private Corner, a digital native management company, the benefits of investing in secondary private equity funds.

Guides

Private assets: fundamentals and outlook for 2025

Non-listed investments and private equity: where to put your money in 2025? This is the question on everyone's lips as the end of the year approaches. In this final 2024 edition of Unquoted under the microscope, we share with you the key points to bear in mind for investors interested in unquoted assets in 2025.