New Research Shows Diversification of Funds of Hedge Funds Increases Risk

``Examining a new database of 3,767 funds of funds that separates out, for the first time, the effects of diversification (the number of underlying hedge funds) from the scale (the magnitude of assets under management), the authors find that once a fund of funds holds more than 20 underlying hedge funds, the benefit of diversification substantially diminishes. In fact, excess diversification actually increases their risk exposure because of the common exposure to market tail risk.''