A fund that invests in a variety of individual hedge funds, typically from 10 to 30 underlying funds. As such, the hedge fund market allows private investors to buy into hedge funds which themselves invest in hedge funds. By investing in funds of funds, money can be pooled from a large number of investors and the overall risk can be reduced through spreading it over a number of different hedge funds. Funds of hedge funds provide a good entry-level investment because of the additional diversification that is possible therein. Investing in funds of funds also significantly helps investors quite easily perform the due diligence process. Notwithstanding these advantages, funds of hedge funds add another layer of fees. Investors will need to pay fees not only at the individual underlying fund level but also to the fund of fund manager. Another important consideration is the evaluation of the tax effects of these investments.

Funds of hedge funds are known for short as FOHFs or FoFs.