The perception that fund of funds are less risky because of diversification may only be a myth. Patrick Armstrong of Insights Investments has been tracking cautious-managed, balanced-managed and active managed fund of funds sectors since joining the London-based firm three and one-half years ago and found that manager of FoFs in two of the three sectors took greater risk to produce better returns.  
Only in the active-managed sector did he find that less risk than average resulted in strong returns. Armstrong told Citywire, "If funds of funds are [taking on more risk] on an intended basis that's fine, but if they are doing it on an unintended basis, that is risk." A key factor in the high volatility, he says, is the sectors' bias to small caps, which have been doing well in the current market.