The Risk Profile of Private Equity Fund-of-Funds

1 Pages Posted: 3 Jun 2005

See all articles by Tom Weidig

Tom Weidig


Andreas Kemmerer

Goethe University Frankfurt

Bjorn Born


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Private equity fund-of-funds (FoF) investments are now contributing more than 10% of the capital to private equity, i.e. venture capital and buyout. However, their risk profile is not well understood due to the opaque and illiquid market, and the limited access to performance figures. FoFs need to understand their own risk profile, if they are to convince potential investors of their lower risk. Research on direct and fund investments exists. Directs show significant variability of returns with a significant probability of a total loss and extreme profits. Funds are less risky, because they invest in up to twenty direct investments. We show that FoFs even further significantly reduce the risk due to diversification. To this aim, we present a framework to construct the risk profile of FoFs using fund performance data. We also discuss the chosen data source, and the results of the simulations.

Keywords: Private equity, venture capital, fund-of-funds, risk, return, buyout, performance

JEL Classification: G11, G24

Suggested Citation

Weidig, Tom and Kemmerer, Andreas and Born, Bjorn, The Risk Profile of Private Equity Fund-of-Funds. Journal of Alternative Investments, Vol. 7, No. 4, pp. 33-41, 2005. Available at SSRN:

Tom Weidig

QuantExperts ( email )

9, rue Donven
Esch-Alzette, 4084

Andreas Kemmerer (Contact Author)

Goethe University Frankfurt ( email )

Mertonstr. 17-21
60325 Frankfurt

Bjorn Born

Independent ( email )

No Address Available

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