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Private equity (PE) fund of funds (FoFs) structures have long been instrumental in democratizing access to diverse, institutional-grade private equity portfolios. Luxembourg has emerged as a leading domicile for FoF vehicles, driven by its regulatory sophistication, distribution reach, and investor-friendly structuring options.
Recent advancements, particularly in artificial intelligence (AI) and machine learning, are further enhancing the value proposition of these funds by improving manager selection, portfolio monitoring, and operational efficiency
Today’s fund of funds role
Fund of funds allocate capital across a curated group of underlying investment managers – hedge funds, private equity, venture capital, private credit, and real assets. Their value proposition rests on the following key benefits that we have witnessed in 2025:
- Diversification: Exposure to multiple GPs, strategies, vintages, and geographies.
- Access: Enables smaller investors to access top-tier funds typically reserved for large institutions.
- Risk Mitigation: Reduces idiosyncratic risk through portfolio construction.
- Liquidity Management: Structured liquidity provisions and staggered cash flows allow for predictable capital planning.
- Access to Top-Tier Managers: Many high-performing funds are closed to new investors. FoFs act as gateways, providing access to elite managers and niche strategies.
What Luxembourg offers
Luxembourg is the domicile of choice for many FoF vehicles due to its flexible regulatory options and global fund servicing ecosystem. Key structures include:
- SIF (Specialized Investment Fund): Tailored for institutional and well-informed investors.
- RAIF (Reserved Alternative Investment Fund): Offers faster time-to-market without a direct regulatory approval structure managed by an authorized AIFM. They have become very popular for PE FoFs due to their agility.
- Part II Funds and ELTIF 2.0: Enables broader investor access, including retail and semi-professionals.
- Limited Partnerships (SCS/SCSp): Flexible partnership vehicles (often used in RAIF or unregulated formats) mirroring Anglo-Saxon LP structures. The SCSp was a game-changer, allowing Anglo-American style limited partnerships in Luxembourg with no legal personality. This has become a standard for PE and FoF fund structuring, giving GPs familiarity and flexibility.
These structures can be managed under the AIFMD framework, ensuring investor protection and passporting capabilities across the EU.
Market trends and statistics
Pitchbook’s preliminary Q2 2025 FoF data shows a strong 6.0% rebound¹ in quarterly returns, driven by robust distributions. While figures may shift due to FoFs’ typically lagged reporting, this trend could signal renewed momentum for FoF strategies. Historically, FoFs offered VC access and manager selection in a high-dispersion market, but recent exposure hurt performance amid rising rates and macro headwinds since 2022, with negative trailing IRRs every quarter since Q3 2022. Now, VC FoFs returns appear to be stabilizing, and an improving VC outlook could provide a tailwind for FoFs.
Luxembourg continues to lead Europe in alternative fund structuring.
As of July 2025, the total number of assets under management (AuM) of investment funds domiciled in Luxembourg, including UCITS and Alternative Investment Funds (AIFs)(including the combined assets of Part II funds, SIFs, SICARs, and RAIFs) amounted to EUR 7,432 billion (change over the last 12 months: +8.07%).² FoFs make up EUR 382 billion – a significant portion with net assets of.³
FoF products are seeing rising demand among family offices, insurers, and institutional allocators seeking scalable solutions.
AI revolution in fund of funds
AI is reshaping the FoF landscape, from due diligence to portfolio optimization. AI models analyze manager track records, factor exposures, risk-adjusted returns, and behavioral characteristics. Technology is becoming a key enabler of efficiency and insight in PE FoF platforms. Applications include:
▸ Manager Selection: AI can analyze vast data on fund performance, team dynamics, and ESG metrics. AI tools read and compare audit reports, valuation methodologies, side letters, and regulatory filings making operational due diligence more efficient.
▸ Portfolio Construction: Machine learning models help simulate risk-return profiles across scenarios. These models ingest historical fund performance, macroeconomic indicators, and manager-specific data to:
- Optimize allocation across underlying funds.
- Stress-test portfolios under different market conditions.
- Identify diversification benefits and tail-risk exposures.
▸Operational Efficiency: Natural language processing (NLP) automates data extraction from fund reports.
▸ Monitoring & Risk Management: Real-time dashboards powered by predictive analytics support early detection of underperformance.
The next generation of FoFs combines human judgement with AI-driven analytics, resulting in more resilient, transparent, and efficient portfolios.
Industry-wide challenges
Luxembourg: what is [especially] relevant
Strong supervisory focus on valuation & NAV errors
The CSSF has been active on valuation governance and NAV correction rules. Recent CSSF work (ESMA CSA follow-up, liquidity/valuation reviews) and the new CSSF Circular on NAV corrections broaden expectations on documentation, notification and remediation of NAV errors. Expect stricter scrutiny, quicker reporting obligations and less tolerance for weak controls.
AIFMD / AIFMD II / depositary and delegation rules
The implementation of AIFMD II changes (delegation, depositary obligations, valuation oversight) means managers in Luxembourg need to revisit depositary agreements, delegation arrangements and valuation policies. FoFs that rely heavily on delegated services must show strong oversight.
SFDR & ESG disclosure enforcement
SFDR enforcement activity in Luxembourg (including sanctions for disclosure failures) increases the compliance burden for FoFs marketed in the EU, especially where fund of funds are aggregating underlying managers’ ESG claims and must ensure consistency and evidence.
Fund-type / structuring nuances
Wide array of Luxembourg vehicles (SICAV, SIF, RAIF, Part II, FCP, LPs) gives flexibility but also structural complexity for accounting, tax and investor reporting. Choosing domicile/vehicle affects reporting, tax transparency and regulatory oversight.
Conclusion
Private equity fund of funds are an enduring and growing part of the private market landscape, and Luxembourg’s regulatory and operational ecosystem makes it a natural hub for these strategies. The rise of AI and machine learning will further transform how FoF portfolios are constructed and managed, unlocking new efficiencies and insights. As private capital continues to institutionalize and democratize, Luxembourg-based FoF strategies are poised for long-term relevance and growth.
Summary
Private equity (PE) fund of funds (FoFs) structures have long been instrumental in democratizing access to diverse, institutional-grade private equity portfolios. Luxembourg has emerged as a leading domicile for FoF vehicles, driven by its regulatory sophistication, distribution reach, and investor-friendly structuring options.
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