The performance and diversification benefits of funds of hedge funds

Emily Denvir and Elaine Hutson

Centre for Financial Markets Working Papers from Research Repository, University College Dublin

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.

Keywords: Hedge funds; Fund of hedge funds; Diversification; Skewness; Hedge funds--Evaluation; Investments--Evaluation (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2004
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http://hdl.handle.net/10197/1179 First version, 2004 (application/pdf)

Related works:
Journal Article: The performance and diversification benefits of funds of hedge funds (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:rru:cfmwps:10197/1179

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