TY - JOUR T1 - Hedge Fund of Fund Allocations Using a Convergent and Divergent Strategy Approach JF - The Journal of Alternative Investments SP - 44 LP - 53 DO - 10.3905/jai.2004.419603 VL - 7 IS - 1 AU - Sam Y Chung AU - Mark Rosenberg AU - James F. Tomeo Y1 - 2004/06/30 UR - https://pm-research.com/content/7/1/44.abstract N2 - 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. ER -