Diversification Strategies and the Performance
of Funds of Hedge Funds

Abstract

Funds of hedge funds are diversified investment vehicles that provide investors with diversification either across managers within a specific hedge fund strategy or across a wide range of hedge fund strategies. In this article, the authors contrast the performance of funds of hedge funds that diversify across managers (but stay within a single hedge fund strategy) versus those that diversify across managers and hedge fund strategies. Their empirical results provide strong evidence in favor of the latter. Funds of hedge funds that diversify across both managers and strategies outperform those funds that diversify across managers but stay within a single hedge fund strategy.