How to Evaluate a New Diversifier with 10 Simple Questions

Alternative Investment Research Centre Working Paper No. 39

Cass Business School Research Paper

18 Pages Posted: 28 Nov 2006

Date Written: December 1, 2006

Abstract

In this paper we discuss a number of important questions to ask when analysing a new alternative diversifier from either a stand-alone, asset-only or asset-liability point of view. The framework is simple, but highly effective. Apart from the new diversifier's statistical properties, it emphasizes the importance of properly accounting for parameter uncertainty and illiquidity; two elements very often ignored by investors. It also shows the importance of taking the correct perspective when evaluating a new diversifier. What looks good from a stand-alone perspective need not look good in a portfolio context and vice versa. Application of the above framework to funds of hedge funds, commodities and synthetic funds underlines the advantages and disadvantages of these diversifiers and clearly points at synthetic funds as the most and funds of hedge funds as the least attractive of the three.

Keywords: Diversification, alternative investments, hedge funds, commodities, synthetic funds

JEL Classification: G11, G23

Suggested Citation

Kat, Harry M., How to Evaluate a New Diversifier with 10 Simple Questions (December 1, 2006). Alternative Investment Research Centre Working Paper No. 39; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=947327 or http://dx.doi.org/10.2139/ssrn.947327

Harry M. Kat (Contact Author)

Independent

No Address Available

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