Is It Worth Paying Double Layer Fees For Fund of Funds?
Yes, for the right partner.
Years ago, I read Jon Krakauer’s Into Thin Air, his account of the 1996 Everest disaster. The story stuck with me ever since.
A group of climbers were just a few hundred meters from the summit. The sky was clear, spirits were high, and turning back felt unthinkable. Then the weather turned. A storm swept in without warning. What had seemed safe became deadly in minutes. Some climbers pushed on, ignoring Sherpa warnings. By nightfall, eight people had died—many of them strong, skilled climbers undone by misjudgment.
Climbing Everest isn’t just about strength or courage. It’s also about judgment and risk management — qualities that Sherpa guides bring to every expedition. They don’t merely carry gear; they read the terrain, sense danger early, and make the hard calls when conditions change.
Similarly, investing in alternatives presents many challenges, and having an experienced guide can be the difference between success and failure.
The Hidden Dangers Beneath the Surface
At first glance, allocating to alternatives seems simple. Find some well known managers, commit capital, wait for returns. But in reality, dangers often lurk below the surface.
Think of operational risks as hidden crevasses. A manager may have great track record. But inside, there can be weak controls, key-person issues, process loopholes, or legal traps. These are hard to spot without deep due diligence and years of pattern recognition. Many investors (me included) have fallen into these “holes” unexpectedly.
Strategy blow-ups are like avalanches that build silently. Crowding, over-leverage, over-capacity, or slow style drift may not be obvious at first. Then, as pressure builds past a tipping point, it all comes down at once, wiping out years of returns within months. By the time the danger is clear, it’s already too late to exit.
Storms are the unexpected events that change everything overnight. Deleveraging, regulatory changes, geopolitical shocks, or sudden market dislocations can turn a clear path into chaos. Just as clear sky can rapidly and unpredictably turn into deadly storm on Everest, markets can shift fast and cause inexperienced allocators to react in an imprudent manner.
Large institutions can mitigate these risks with experienced teams, robust systems, and deep networks. But for smaller allocators, the path is more treacherous. Without the right guide, the risks are high.
Why The Right Guide Matters
In the investment world, good FoFs prepare the route by screening and selecting managers, handling legal and operational work, and pacing commitments sensibly. They read the “weather” of markets through experience and networks, calmly handling crisis. They often open doors to capacity-constrained managers that may not be accessible for small investors alone.
More importantly, the right guides doesn’t just execute; they bring you along the journey. You absorb how strong managers are found and assessed. You observe portfolio pacing through cycles. You sharpen sensors to detect dangers beneath the surface. You pick up judgment that might otherwise take a decade to build on your own.
I learned this the hard way. After leaving the sell side to join a single-family office, I suddenly found myself thrust into the allocator role. My sell-side experience poorly prepared me for this new responsibility, forcing me to learn from scratch.
The FoFs I had to work with weren’t interested in teaching. Their process remained opaque. I had to educate myself by persistently asking “why,” and by seizing every opportunity to gather insights. Eventually, I developed my own understanding—but only after making costly mistakes along the way (I will share my lessons learnt in future posts).
While my journey has been deeply rewarding personally, it involves a steep learning curve filled with trial and error that spanned years. For many small allocators, this approach is neither the fastest nor the smartest way to climb the mountain.
The Double Fee Question
The main hesitation many have is: Why pay two layers of fees—manager fees and FoF fees? But I think the real question isn’t “Why pay?” It’s “What’s the cost of not paying?”
On Everest, you could try to save money by climbing without Sherpas. Some elite climbers have done it. But for most, the risks soar. The fee you pay to Sherpa guides isn’t for a luxury service; it’s for a higher chance of reaching the summit and returning safely.
The same holds for FoFs. The added fee layer buys reduced risk, better access, seasoned judgment, and operational lift. For a small allocator, the cost of a single misstep, such as selecting a wrong manager, can easily outweigh the fee savings.
Tips for Picking the Right FoF Partner
1. Hire judgment, not just access.
Networks are common; real experience is rare. Ask how they’ve handled past crises to see if they can read the mountain.
2. Choose guides, not gatekeepers.
The right FoF is open with their thinking and willing to teach. If they aren’t forthcoming on your “why” questions, keep looking.
3. Set expectation for knowledge transfer upfront.
Set clear expectations that your team will learn along the way. The best partners leave you stronger, not dependent.