Portfolios of Hedge Funds: What Investors Really Invest in

22 Pages Posted: 15 Jan 2002

See all articles by Harry M. Kat

Harry M. Kat

Independent

Gaurav S. Amin

Albourne Partners; University of Reading - ICMA Centre

Date Written: January 11, 2002

Abstract

Using monthly return data over the period June 1994 - May 2001 we investigate the performance of randomly selected baskets of hedge funds ranging in size from 1 to 20 funds. The analysis shows that increasing the number of funds can be expected to lead not only to a lower standard deviation but also, and less attractive, to lower skewness and increased correlation with the stock market. Most of the change occurs for relatively small portfolios. Holding more than 15 funds changes little. The population average appears to be a good approximation for the average basket of 15 or more funds. With 15 funds, however, there is still a substantial degree of variation in performance between baskets, which dissolves only slowly when the number of funds is increased. Survivorship bias is largely independent of portfolio size and thus cannot be diversified away. Finally, our efficiency test indicates that one only needs to combine a small number of funds to obtain a substantially more efficient risk-return profile than that offered by the average individual hedge fund.

Keywords: Hedge fund, portfolio, diversification, survivorship bias, efficiency

JEL Classification: G00

Suggested Citation

Kat, Harry M. and Amin, Gaurav S., Portfolios of Hedge Funds: What Investors Really Invest in (January 11, 2002). Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=296642 or http://dx.doi.org/10.2139/ssrn.296642

Harry M. Kat (Contact Author)

Independent

No Address Available

Gaurav S. Amin

Albourne Partners ( email )

16 Palace Street
London, SW1E 5JD
United Kingdom
02073467000 (Phone)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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