Investors should ‘warm up’ to funds of funds, Opto says

investmentnews.com:

When investors consider fees, they often choose to avoid funds of funds. However, a recent analysis from Opto Investments, a fintech company for RIAs, says that funds of funds might actually be worth considering.

The analysis published earlier this month argued that the historical performance of funds of funds often justifies the higher fees that come along with them. Funds of funds narrow the range of outcomes in any given strategy and they have been consistent with reduced downside risk.

Funds of funds are pooled investment vehicles that allow investors to access multiple managers and multiple strategies in one place. Essentially, they enable investors to invest in various other funds like mutual funds, hedge funds and exchange-traded funds. The high fees typically include the net fees of the underlying funds, along with management fees.

The result is two-fold. Investors in such funds may earn lower net returns than if they had invested in a single regular mutual fund. On the other hand, they can be a perfect substitute for those who don’t have the patience to watch the markets or don’t have the knowledge to pick from individual funds.

Sure, there are some advantages to the public market, like maximizing returns through minimizing fees and index investing. However, Matt Malone, president and head of investment management at Opto, said the reason for higher fees for funds of funds is also because of operational costs within the private market.

“A lot of these investment strategies and fund managers are actively sourcing and structuring their own underlying deals,” Malone said. “They’re not just buying ticker-trading stocks, they’re buying companies, they’re hiring people, they’re developing strategies. There’s a much