Smash the 2025 CAIA Exam – Invest in Success with This Ultimate Practice Test!

A "fund of funds" is a type of investment vehicle that primarily invests in other investment funds rather than directly in individual securities like stocks or bonds. This strategy allows investors to gain broader exposure to a variety of asset classes and hedge fund strategies while benefiting from the expertise of multiple fund managers.

By leveraging the diversity of underlying funds, a fund of funds can help reduce risk through asset allocation and diversification. For example, if one underlying fund performs poorly, others may perform well, which can help stabilize overall returns. This allows investors to access a range of investment strategies and approaches that they might not be able to replicate on their own.

The other options, while related to investing, do not accurately describe the function of a fund of funds. For instance, a fund that invests directly in stocks and bonds does not utilize the fund of funds strategy. Similarly, minimizing fees is not a defining characteristic of a fund of funds; many funds incur management fees from both the underlying funds and the fund of funds itself. Lastly, focusing only on real estate investments would pertain to a real estate fund or a real estate investment trust (REIT), which is distinct from the broader multi-fund approach of a fund of funds.