A fund of funds (FoF) is a pooled investment vehicle that invests into other funds — in the venture context, into VC funds — rather than directly into companies. LPs in a fund of funds gain diversified exposure across multiple fund managers and vintages in a single commitment, which reduces manager concentration risk. In exchange, they pay a second layer of fees: the FoF's own management fee and carry sit on top of the underlying fund fees.
For institutional LPs who lack the internal resources to evaluate and monitor 15 individual fund manager relationships, a fund of funds offers an efficient access mechanism. For family offices and endowments with smaller alternative allocations, a FoF provides diversification that their capital base couldn't achieve through direct commitments. The trade-off is the fee drag — two layers of management fee and carry can substantially reduce net returns relative to direct LP commitments.
Fund of funds managers are increasingly important as LPs in the emerging manager ecosystem. Because they conduct rigorous due diligence on multiple funds simultaneously, their endorsement of an emerging manager carries signal to other LPs. Some FoFs focus specifically on emerging managers — the Emerging Managers Program at CalPERS, for example — explicitly targeting the alpha premium that research suggests first-time and second-time fund managers can deliver relative to established incumbents.