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The performance and diversification benefits of funds of hedge funds

Author

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  • Emily Denvir
  • Elaine Hutson

Abstract

We examine the performance and diversification potential of 332 funds of hedge funds (FOHFs) for the period from January 1990 to May 2003. Consistent with prior studies, we find that FOHFs appear to underperform the hedge fund index on a risk-adjusted basis. However, FOHFs have characteristics that offset their apparent underperformance. Their returns do not suffer from negative skewness that is a feature of many hedge fund strategies. In addition, we find that FOHFs have lower correlations (than the hedge fund index) with stock indices in both bull and bear markets, making them a better diversification tool in equity portfolios. For bond portfolios, however, FOHFs have no diversification advantage over hedge fund indexing.

Suggested Citation

  • Emily Denvir & Elaine Hutson, 2004. "The performance and diversification benefits of funds of hedge funds," Centre for Financial Markets Working Papers 10197/1179, Research Repository, University College Dublin.
    • Handle: RePEc:rru:cfmwps:10197/1179
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    File URL: http://hdl.handle.net/10197/1179
    File Function: First version, 2004
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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