Catalyzes the hydrolysis of endogenous amidated lipids like the sleep-inducing lipid oleamide ((9Z)-octadecenamide), the endocannabinoid anandamide (N-(5Z,8Z,11Z,14Z-eicosatetraenoyl)-ethanolamine), as well as other fatty amides, to their corresponding fatty acids, thereby regulating the signaling functions of these molecules. Hydrolyzes polyunsaturated substrate anandamide preferentially as compared to monounsaturated substrates. It can also catalyze the hydrolysis of the endocannabinoid 2-arachidonoylglycerol (2-(5Z,8Z,11Z,14Z-eicosatetraenoyl)-glycerol). FAAH cooperates with PM20D1 in the hydrolysis of amino acid-conjugated fatty acids such as N-fatty acyl glycine and N-fatty acyl-L-serine, thereby acting as a physiological regulator of specific subsets of intracellular, but not of extracellular, N-fatty acyl amino acids.