The pitch is access and curation: minimums into individual hedge or private funds can be prohibitive, due diligence is expensive, and a fund of funds spreads capital across managers and strategies.
The cost is fee stacking. A 1% and 10% fund of funds on top of underlying managers charging 1.5% and 20% produces an all-in load that requires substantial gross returns to leave the investor with much. Compounded, the second layer is what has driven consolidation and direct allocation by larger institutions.
Diversification across managers also dilutes toward the average manager, which after two fee layers is a difficult starting point. Where the vehicle earns its keep is access to closed managers and genuine operational due diligence. See multi-strategy-fund.
Related: multi-strategy-fund, hedge-fund, management-fee, performance-fee, fee-drag, family-office