Open-ended investment funds

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Open-ended investment funds are open-ended investment funds that invest their investors' capital in units of other investment funds. Their English designation is fund of funds.

In this segment, too, there are individual Open-ended investment funds that specialise in a particular asset class or investment theme. Among others, these can be funds of hedge funds, funds of equity funds, funds of ETF funds.
Investors protected by regulations

A fund of funds authorised in Europe is open to all investment funds also authorised in Germany that are not themselves Open-ended investment funds, special funds or closed-end funds. The restriction is intended to avoid possible cascading effects.

Furthermore, it is stipulated that a single target fund may not exceed a share of 20 percent of the total assets of the fund of funds. A fund of funds is also not permitted to hold more than 10 percent of the target fund's assets.

Open-ended investment funds not permitted in Europe for a long time

It was not until 1998 that there was a new regulation of Open-ended investment funds in Europe. Prior to that, such investments had been prohibited for decades after the first fund of funds FOF (Fund of Funds), which was launched in 1962 by the company Investors Overseas Services (IOS), had destroyed a large amount of investor assets due to concealment, embezzlement and a kind of Ponzi scheme in the 1970s.

Open-ended investment funds have a reputation for being particularly expensive. Hardly anyone will be able to deny that in the case of Open-ended investment funds there is an additional management level of the fund of funds manager in addition to the management of the target funds, which is of course paid by the investor.  Some fund-of-fund managers therefore have performance-based fee models, the so-called "performance fee".

Fund of funds clearly better diversified

Due to the fund management fees incurred, the majority of Open-ended investment funds cannot compete with individual funds in terms of the cost burden on investors. However, the biggest advantage of Open-ended investment funds is that they diversify across funds and fund managers, whereas single funds do not offer this breadth.

The fund manager of the fund of funds is able to allocate the most attractive funds to the market segments to be covered. In this way, he can represent practically any risk-return profile. For the investor, this opens up the advantages of a broadly diversified and actively managed portfolio.

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Diversification demanding

For the diversification aspect, the independence of the fund-of-funds management is indispensable. This means that funds of a certain house (possibly those of one's own house bank) are not increasingly taken into account. In addition, diversification also requires great effort in allocation so that there are no overlaps that are too obvious. These would hide diversification and possibly promote the formation of lumps.

Lack of transparency as a minus

For Open-ended investment funds, not only the cost level already mentioned but above all weaknesses in transparency are the biggest disadvantages compared to trading CFDs in, since it is hardly possible for a private investor to judge from only partial aspects of the individual stock selection.

The fund-of-funds manager has the freedom to select funds that far exceed the usual range of open-ended mutual funds.

If the fund of funds has also acquired shares in funds that have meanwhile been closed to new investors (e.g. because of a volume reached), the investor has the possibility with his commitment to participate (almost at any time) via the fund of funds' assets in attractive investment ideas that would not be open to him as a normal investor.

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