A fund of hedge funds invests in several hedge fund managers and encompasses manager selection, portfolio construction, risk evaluation and portfolio rebalancing.

Funds of hedge funds provide investors with spreading of risk among strategies and hedge fund managers as well as professional portfolio management.

By allocating to a wide range of hedge fund managers and strategies, funds of hedge funds seek to smooth out periods of above and below-average performance by individual strategies and generate a more stable return stream, although there can be no assurance of success.