Publication Type
Magazine Article
Version
Publisher’s Version
Publication Date
4-2013
Abstract
We explore the diversification benefits of increasing the number of hedge funds in an investment portfolio. Conventional wisdom suggests that investors should construct a portfolio of 20 to 30 hedge funds in order to achieve a reasonably low portfolio variance. We show using Monte Carlo simulations that the marginal benefit of including an additional hedge fund in a fund portfolio diminishes significantly once the number of hedge funds increases beyond ten. Specifically, the annualized standard deviation of a fund portfolio diminishes from 16.55 percent to 7.40 percent as we increase the number of funds from one to ten. However, the standard deviation only drops by an additional 0.55 percent when we increase the number of funds to 15. Investors can crimp portfolio variance further by spreading their capital judiciously across multiple hedge fund strategies. These findings are especially relevant for investors who are transiting from indirect investments via funds of hedge funds to direct investments in single-manager hedge funds.
Keywords
hedge funds, diversification, investment portfolio
Discipline
Finance and Financial Management
Research Areas
Finance
Publication
Hedge Fund Insight
First Page
2
Last Page
7
Publisher
BNPP Hedge Fund Centre
City or Country
Singapore
Citation
Teo, Melvyn. 2013 April. Diversification in Hedge Fund Portfolios. Hedge Fund Insight, 2-7.
Copyright Owner and License
BNP Paribus Hedge Fund Centre, Singapore Management University
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.