Diversification Strategies and the Performance of Funds of Hedge Funds

Funds of hedge funds are diversified investment vehicles that provide investors with diversification either across managers within a specific hedge fund strategy or across a wide range of hedge fund strategies. In this paper, we contrast the performance of funds of hedge funds that diversify across managers (but stay within a single hedge fund strategy) versus those that diversify across managers and hedge fund strategies. Our empirical results provide strong evidence in favor of the later. Funds of hedge funds that diversify across both managers and strategies outperform those funds that diversify across managers but stay within a single hedge fund strategy.