Asset Allocation Diversification

Hedge Fund Diversification

Asset Allocation Diversification is the allocating of investments to various asset classes such as stocks, bonds, and cash. Investments can also be diversified by strategy; growth, value, blend, etc. Geographic diversification involves investing in various regions, states, countries, continents, etc.

Within asset allocation diversification there are multiple styles that can be utilized. involves having multiple investments within the same “class.” Holding different companies with the S&P would be indicative of broad horizontal diversification while owning several stocks within the health care sector would be more representative of narrow horizontal diversification.

Vertical diversification is characterized by owning multiple classes of investments. The typical stock and bond portfolio is broad vertical diversification, while having a portfolio comprised of stocks of different branches is an example narrow diversification.

Diversification can be measured by the probability of how the various investments within the portfolio can be expected to perform in relation to each other (i.e. correlation).

Read dozens of additional articles like this within the guide to Hedge Fund Terms.

- Richard

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