Diversification in the hedge fund industry |
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| Authors: | Hany A. Shawky Na Dai Douglas Cumming |
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| Affiliation: | 1. Department of Banking & Finance, Monash University, Clayton, Australia;2. Department of Econometrics & Business Statistics, Monash University, Clayton, Australia;1. INSEAD, Boulevard de Constance, 77300 Fontainebleau, France;2. Federal Reserve of St. Louis, Federal Reserve Bank Plaza, 1 Broadway, St. Louis, MO 63102, United States;1. School of Economics, University of Nottingham, University Park, NG7 2RD, United Kingdom;2. School of Economics, University of Edinburgh, 31 Buccleuch Place, EH8 9JT, United Kingdom |
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| Abstract: | We provide evidence of a significant relation between diversification and performance in the hedge fund industry. Measuring diversification across four distinct dimensions, we find a significant positive relation between hedge fund performance and diversification across sectors and asset classes. We show that on a risk adjusted basis, hedge funds that diversify across sectors and asset classes outperform other funds by an average of 1.1% per year. However, diversification across styles and geographies exhibits a significant negative association with hedge fund returns. Funds that diversify across styles and geographies underperform other funds by an average of 1% per year. For fund of hedge funds, we find a significant positive relation between performance and diversification across sectors. However, diversifying across asset classes and geographies is found to exhibit a negative relation with fund performance. Finally, we find that the motive to engage in diversification is consistent with managerial incentive structure in the hedge fund industry. |
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