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Sub-funds of funds are investment vehicles used by alternative portfolio managers, providing diversification by exposure to multiple different funds. Secondary funds are traded on a market other than the primary market, allowing for buying and selling of assets. This platform can be especially helpful for private investment fund managers and hedge funds, who often invest in illiquid assets. Selling a secondary fund of funds to the original owner generates income, and buyers can obtain certain exposures at a discount. Secondary markets can make the liquidation process more feasible for fund of funds.
A sub-fund of funds is an investment vehicle typically used among alternative portfolio managers, including private equity or hedge fund professionals. To understand a sub-fund of funds, it helps to understand the role of a portfolio of funds of funds. This type of investment vehicle provides diversification to individuals and institutions by providing exposure to multiple different funds that may be overseen by different managers and companies. Secondary funds are traded on a market other than the primary market. This platform allows investors to buy or sell assets, operations that would otherwise be impossible or take longer in the primary markets.
The nature of the assets purchased by private investment fund managers and hedge funds is often illiquid in nature. As a result, these positions cannot be easily sold and turned into cash. Instead, these alternative money managers typically invest in certain categories with the expectation of holding those positions for multiple years. However, in some cases, companies need to get paid early, either to meet customer demands or to generate liquidity for some other reason. Bypassing the primary markets can be especially helpful, and this is where a secondary fund of funds might trade.
One benefit to selling a secondary fund of funds to the original owner is that the company cashes in positions and generates income. A buyer of one of these funds can obtain certain exposures at a discount to the cost of buying similar assets in the primary markets. There are different reasons for trying to download a secondary fund of funds. For example, it could be that the owner is experiencing financial difficulties or investors have requested financial withdrawals. Market participants are often interested in using a trading platform that is transparent where all participants are identified to prevent fraud in an unconventional market.
While secondary markets are a non-traditional place for transactions to take place, so are unique funds of funds. A consortium of private equity and hedge fund firms oversees individual portfolios on behalf of clients. On the other hand, a fund of funds manager gains ownership of various other money management companies. As a result, these portfolios could be especially hard to sell quickly due to the mix of multiple assets tied to multiple managers. Secondary markets could make the liquidation process more feasible for the fund of funds.
Smart Asset.
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