As we know that investment in the Hedge Fund requires a very high minimum amount which only the high net worth individuals and pension, endowment, corporate funds can afford. To make the small retail investors enable to invest in hedge funds, the Fund of Funds are formed which invests in different hedge funds. Due to the low minimum investment amount requirement, the small retail investors and individuals along with the high net worth individuals and funds can invest in the Fund of Funds.
Fund of Funds invest the money raised from different investors into a wide range of hedge funds. That reduces the risk of a particular hedge fund being failed and increases the diversification and exposure into more financial instruments. The investors can also choose the hedge funds based on their preferences on the risk-return strategy and aggressiveness of the fund managers.