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Diversification in the hedge fund industry

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  • Shawky, Hany A.
  • Dai, Na
  • Cumming, Douglas

Abstract

We provide evidence of a significant relation between diversification and performance in the hedge fund industry. Measuring diversification across four distinct dimensions, we find a significant positive relation between hedge fund performance and diversification across sectors and asset classes. We show that on a risk adjusted basis, hedge funds that diversify across sectors and asset classes outperform other funds by an average of 1.1% per year. However, diversification across styles and geographies exhibits a significant negative association with hedge fund returns. Funds that diversify across styles and geographies underperform other funds by an average of 1% per year. For fund of hedge funds, we find a significant positive relation between performance and diversification across sectors. However, diversifying across asset classes and geographies is found to exhibit a negative relation with fund performance. Finally, we find that the motive to engage in diversification is consistent with managerial incentive structure in the hedge fund industry.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 18 (2012)
Issue (Month): 1 ()
Pages: 166-178

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Handle: RePEc:eee:corfin:v:18:y:2012:i:1:p:166-178

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Diversification; Specialization; Hedge funds; Fund of funds; Asset size; Performance;

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References

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