A "fund of funds" is a package of funds of the same type, and is sold as one single product. There are several types of fund of funds, including mutual fund of funds, hedge fund of funds etc. Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different mutual funds. These funds are designed to achieve even greater diversification than traditional mutual funds. On the downside, management fees on fund of funds are typically higher than those on regular funds because they include part of the management fees charged by the underlying funds. In addition, since a fund of funds buys many different funds which themselves invest in many different stocks, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings.

Funds of funds are more frequently discussed now with regard to investing in hedge funds as opposed to more traditional mutual funds. This is because hedge funds typically have much higher minimum investments and require more due diligence before investment. Pension funds and other institutions often invest in funds of funds for part or all of their "alternative asset" programs, i.e. investments other than traditional stock and bond holdings.

While funds of funds conceptually can provide extremely useful services for such investors, they have come under fire recently for the significant incremental costs they impose. (The underlying hedge funds usually charge fees of between 1 and 2% of assets managed and incentive fees of 15-25% of profits generated. The funds of funds typically add additional fees of 1% and 10%, respectively). Moreover, fund-of-funds behavior has often exhibited crowd-following tendencies, suggesting the managers of these funds prefer to match indices rather than seek opportunities.