IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Finding the sweet spot of hedge fund diversification

Hedge funds are often thought of as being high-risk investments and many investors in the past have shied away from them for fear of making large losses. However, over the recent years, hedge funds have generally substantially outperformed equities, with much lower volatility. As a consequence, they are now in strong demand, particularly when one remembers that any risk associated with hedge fund investing diminishes in importance when the funds are repackaged into fund of funds products. Once one admits that portfolio diversification reduces manager risk, there is a fundamental question that needs to be addressed, namely, the optimal number of hedge funds to effectively benefit from diversification. In this paper, using a large database of more than 6000 hedge funds, we provide evidence that from a pure market risk perspective, a small number of funds is sufficient to reap most of the diversification benefits, whatever the considered strategy. In addition, for some strategies, too much diversification results in undesirable side effects in the higher moments of the return distribution. Thus, while a fund of hedge funds may mitigate the negative effects of a hedge fund failure through diversification, too much diversification is also likely to result in diworsification.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Article provided by Capco Institute in its journal Journal of Financial Transformation.

Volume (Year): 10 (2004)
Issue (Month): ()
Pages: 31-39

as
in new window

Handle: RePEc:ris:jofitr:1342
Contact details of provider: Postal: 120 Broadway, 29th Floor New York, NY 10271
Phone: +1 212 284 8600
Web page: http://www.capco.com/
Email:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ris:jofitr:1342. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Springett)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.