What is one advantage of fund of hedge funds (FoHFs) as compared to single hedge funds?

The primary advantage of a fund of hedge funds (FoHF) is diversification. By investing in a FoHF, an investor gains immediate exposure to a portfolio of multiple underlying hedge funds, which may employ different strategies and be run by different managers. This diversification helps to mitigate manager-specific risk and strategy-specific risk, providing a smoother return profile than would be expected from investing the same amount in a single hedge fund.

B. The FoHF structure itself does not add leverage; leverage is employed by the underlying hedge funds.
C. FoHFs are more expensive due to a double layer of fees: fees for the underlying funds plus fees for the FoHF manager.
D. Stronger returns are not guaranteed; the additional layer of fees can act as a significant drag on performance.

1. Brown, S. J., Goetzmann, W. N., & Ibbotson, R. G. (1999). Offshore Hedge Funds: Survival and Performance, 1989-1995. The Journal of Business, 72(1), 91-117. https://doi.org/10.1086/209608. This paper discusses the benefits of diversification in hedge fund investing.

2. Anson, M. J. P. (2006). The Handbook of Alternative Assets. John Wiley & Sons. Chapter 12, "Funds of Hedge Funds," Section 12.3, "Benefits of Funds of Hedge Funds," explicitly lists diversification as the key advantage.

3. MIT OpenCourseWare. (2003). 15.433 Financial Markets, Lecture Notes, Lecture 21: Hedge Funds. Section 4, "Funds of Funds," outlines the pros and cons, citing diversification as the main pro and the double layer of fees as the main con.