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The Journal of Alternative Investments

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Primary Article

Hedge Fund of Fund Allocations Using a Convergent and Divergent Strategy Approach

Sam Y Chung, Mark Rosenberg and James F. Tomeo
The Journal of Alternative Investments Summer 2004, 7 (1) 44-53; DOI: https://doi.org/10.3905/jai.2004.419603
Sam Y Chung
An assistant professor of finance at Long Island University in Brooklyn, NY.
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  • For correspondence: sam.chung@liu.edu
Mark Rosenberg
Chairman and chief investment officer of SSARIS Advisors LLC in Stamford, CT.
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  • For correspondence: mrosenberg@ssaris.com
James F. Tomeo
Chief operating officer and senior portfolio manager at SSARIS Advisors LLC in Stamford, CT.
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  • For correspondence: jtomeo@ssaris.com
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Abstract

Hedge fund asset allocation can be a challenging endeavor given the dearth of tools available to deal with the unique statistical characteristics of long and short strategies. From a top-down perspective, the hedge fund industry is classified into several substyle categories including long/short equity, market neutral equity, convertible bond arbitrage, merger arbitrage, event driven, global macro, and managed futures. However, due to the non-correlated nature of rates of return in each style group, the problem of asset allocation appears overly simplistic. This article takes a different view of the hedge fund universe, classifying strategies as “convergent” or “divergent” in their orientation and thereby adding new meaning to the process of asset allocation. Convergent strategies tend to view the asset world as being mostly efficient, seeking to profit from small asset mispricings. Divergent strategies are based on the premise that from time to time, the market is inefficient, providing opportunities that can be exploited by using price series analysis and autocorrelations when pricing certain portfolio assets. Since convergent strategies tend to be “short volatility” and divergent strategies “long volatility,” using a top-down asset allocation policy that recognizes this asset dynamic can lead to a more efficiently allocated hedge fund portfolio. The results of this study show the time-varying validity of the divergent strategy and its potential benefits as a portfolio component. Since the divergent strategy experiences significantly higher performance during the periods of increasing market uncertainty, when it is combined with the convergent strategy, the portfolio experiences increased return and reduced risk with more favorable return distributions relative to the individual convergent strategies.

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The Journal of Alternative Investments
Vol. 7, Issue 1
Summer 2004
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Hedge Fund of Fund Allocations Using a Convergent and Divergent Strategy Approach
Sam Y Chung, Mark Rosenberg, James F. Tomeo
The Journal of Alternative Investments Jun 2004, 7 (1) 44-53; DOI: 10.3905/jai.2004.419603

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Hedge Fund of Fund Allocations Using a Convergent and Divergent Strategy Approach
Sam Y Chung, Mark Rosenberg, James F. Tomeo
The Journal of Alternative Investments Jun 2004, 7 (1) 44-53; DOI: 10.3905/jai.2004.419603
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  • Beyond Factor Decomposition
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