To What Degree Does Diversification Reduce Risk? What Arguments Can Be Formed Against Diversification? Use Examples from Your Own Company or One You Know Well.

Unfortunately, this year also marks the third straight year we report on a hedge fund industry mired in underperformance. However, the woes facing the hedge fund industry are compounded this year, reaching beyond performance, creeping into fund raising and industry expansion. This year is witness to net negative asset flows and actual reductions in the number of hedge fund firms, as firm closures

George Soros, a significant hedge fund manager, made a considerable return of one billion dollars in a single day by taking advantage of the English Pound and selling it a favorable time. This is considered by many financial analysts to be one of the most exceptional investments of all time. Instances such as the latter are not rare in the profession of hedge fund managing. These individuals look over hedge fund portfolios, which often use high risk methods in order to achieve an exceptional return on an investment in spite of the current market conditions. Even though the career of managing hedge funds is competitive and high-risk, the potential salary and benefits that are available with this quickly growing career is a stimulus in regards to the need for more investors in the market.

Hedge funds for many years have attracted billions of dollars from investors in search of higher returns. Performance in Hedge funds is driven by two components, alpha (manager skill) and beta (market-driven return). From 2009 to 2014 the financial markets experienced strong bull markets, and beta has driven hedge fund performance as managers with net long market exposure were rewarded. However, over this time period, investors’ return expectations have declined from the high-teens back in 2009 to above 10% in 2014 and to mid-to-high single digits today. This change in expectations in expected returns stems from the idea that beta will add very little value over the next few years due to the capital markets trading near all-time highs.

Markides attributes the "Lack of conventional wisdom available to managers in deciding to diversify, which may ultimately lead in increasing shareholder value or damaging it seriously." (1997:94)

We will extend our findings about undercapitalization in Table 4 based on our conclusions from Table 3. From Table 3, we know that there are 222 undercapitalized live hedge funds, and it consists only 8.1% of all the live funds. From this we can reach the conclusion that only a small fraction of live hedge funds are undercapitalized. Most of the live hedge funds (about 91.9%) can stay out of the risk of being undercapitalized. While the undercapitalized ratio for dead funds is 12.3%, so more dead funds are undercapitalized compared with the ratio of live funds. Since the ratio of undercapitalization plays an important role in determining the performance of a hedge fund, we will take a further look into the details of undercapitalization in Table 4. We list a number of variables that would usually have influence on the cap ratio. By comparing the different variable values under the category of adequately capitalized funds and under-capitalized funds, we can determine the key elements that would usually influence the cap ratio of a hedge fund. Table 4 also illustrates the comparative characteristics between live and dead hedge funds. We can specify the characteristics in the following points. First, the mean of the net asset for the undercapitalized live funds is $88.4 million and the corresponding value for the capitalized funds is $206.1 million. The huge difference between these two values means a positive condition in the capital adequacy of the live funds. More live hedge

The main benefit of a hedge fund is that an investor can make higher returns with a hedge fund compared to the market returns by using leverage from taking a short position in certain stocks.  It is possible for the return for hedge funds to be maintained consistent regardless of whether the market is rising or falling.  On average, a hedge fund will typically carry lower risk than the market. However, given the long/short strategy of hedge funds, there still exists a risk for

However, with the passage of time, people’s understanding of the role of financial derivatives gradually deepening, hedge funds in recent years, favoured because hedge funds have the ability to make money in the bear market. From 1990 to 2002, ordinary public funds lost an average of 11.7 per cent a year, while hedge funds earned 11.2 per cent a year during the same periods. There are some reasons for hedge funds which got such impressive results in surveys, and the benefits they receive are not as easy as the outside, and almost all hedge fund managers are excellent financial brokers.

A hedge fund is a regulated investment fund that is typically open to a limited range of investors who pay a performance fee to the fund’s investment manager. Every hedge fund has its own investment philosophy that determines the type of investments made and strategies employed. In general, the hedge fund community undertakes a much wider range of investment and trading activities than traditional long-only investment funds. Hedge funds invest in a broader range of assets, including long and short positions in equity, bonds, commodities, and derivatives. Hedging out unwanted risk has been a common activity in the financial markets for centuries. In the 1800s, for example, commodity producers and merchants started using forward contracts to protect themselves against futures changes in commodity prices—these contracts hedged out the risk of adverse market fluctuations beyond their control. Such forward contracts are still traded to this day in the futures market. Alfred Jones is credited with the creation of the term “Hedge Fund” in 1949. He created A.W. Jones, a partnership with four friends, and through this vehicle he invested $100,000 in stocks, using both long and short positions. During the first year, the fund returned 17.3%. The idea has caught fire since.

In today’s global markets companies are faced with tough decisions, one of the toughest decisions a corporation faces is whether or not they should diversify their business. Diversification simply means to mix a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio (Silvia M.Chan-Olmsted, 2007). Firms that have success strive to transfer their winning business know- how to new activities. To these firms,

Diversification means reducing unsystematic risk by investing in various types of assets and its aims is to maximize return. Diversification is an important component to be consider of reaching long-term financial goals when most of the investors agree that even though it does not assurance against loss while minimizing the risk. There are two main types of risk in investing:

Mergers always arise different types of problems, mainly the reason is because each company operation is based on different

The idea that these countries have a high potential for growth is why many institutional investors have taken a keen interest in investing in emerging market hedge funds. Emerging market hedge funds are invested in a variety of different investments – from basic

Diversification, as a risk management means, mainly concerns the alteration and experimentation of various kinds of investments that are included in a specified portfolio. The reason why it is the usual practice is because a certain portfolio is mostly inclusive of different investments that can bring about higher profits as a relatively lower risk of stand-alone investments within the similar or

Diversification is worth more than a word. It works on reducing the total risk of a portfolio with different asset types. But what contributes to the success of portfolio diversification? A large size of portfolio? A variety types of asset allocation? Adding international investment? Numerous of risk factors? They are all indicators of a well-diversified portfolio. But it is hard to achieve a perfectly diversified portfolio in reality because you cannot diversify all types of risk. Following, we will discuss about the advantages and disadvantages of diversification in portfolio management under circumstances. On one hand, some mention that dynamic and numerous asset allocations in the portfolio will reduce idiosyncratic risk and some level of market risk. While some also suggest benefit exists of introducing multi-factor pricing models to cover different risk factors. On the other hand, arguments arise demonstrating adding international investment may disappoint investors because foreign markets could be correlated and moved together in a global world. Another disadvantage further defined will be the correlated asset allocations weaken the effect of diversification. At the end, conclusion will be drawn to support the useness of diversification.

Every finance students have learnt diversification is to reduce total risk by investing a basket of assets in portfolios. But what contributes to the success of portfolio diversification? A large number of assets? A variety types of asset allocation? Adding international investment? Numerous of risk factors? They are all indicators of a well-diversified portfolio. In this case, we will discuss about the advantages and disadvantages of diversification in portfolio management with related indicators. On one hand, some mention dynamic and numerous assets allocation in the portfolio will reduce both risks. While some also state the benefit of introduce multi-factor portfolio pricing models. On the other hand, arguments arise demonstrating adding international investment may disappoint investors because foreign market could be correlated and moved together. Another disadvantage could be the correlated assets collected weaken the effect of diversification. At the end, a balanced conclusion will be drawn to support the useful diversification.