It can be compared to putting a cork on the surface of the ocean - the cork will go up and down with the waves. The future performance of many hedge fund strategies tends to be highly predictable and not dependent on the direction of the equity markets. It can be compared to a submarine traveling in an almost straight line below the surface, not impacted by the effect of the waves. A fund of funds is a fund that mixes and matches the most successful hedge funds and other pooled investment vehicles, spreading investments among many different funds or investment vehicles. Capital preservation is generally an important consideration.
Volatility depends on the mix and ratio of strategies employed.
Creating a fund of funds can be likened to baking a cake. Working from the same ingredients such as flour, butter, sugar, yeast, eggs, etc., a baker is capable of producing different cakes. So it is with a funds of funds. Understanding the characteristics and risk profiles of the different hedge fund strategies allows the fund of funds manager to blend funds together that often are able to produce fairly predictable returns. In any investment strategy the predictability of future results is strongly correlated with the volatility of past returns of each strategy.