Tuesday, October 9, 2007


In preparation for tonight’s first of three Hedge Fund seminars, I have come across a little piece of information that I frankly found rather startling.

According to an August 21st report from Goldman Sachs, “The typical hedge fund has an average of 58% of its assets invested in its ten largest positions compared with 33% for the typical large-cap mutual fund, 24% for a small-cap mutual fund, 20% for the S&P 500 and just 2% for the Russell 2000 Index (see chart to your left*).”

Let me state that again: 58% of the assets of the typical hedge fund are concentrated in its ten largest holdings.

Investment Strategy Implications

While it is understandable that the purpose of many hedge funds (versus your garden variety mutual fund) is to provide concentrated holdings, the consequences of such a portfolio strategy utilizing highly liquid, publicly traded stocks, the same highly liquid, publicly traded positions held by garden variety mutual funds and other traditionally constructed portfolios, is an area requiring further investigation and analysis. A point I intend to pursue during the upcoming three hedge fund seminars to be conducted this week. More to follow.

*To view a larger version of the chart, click on the image.


Vahan Janjigian said...

Hedge funds follow the "Warren Buffett" strategy. Berkshire Hathaway currently holds about 40 publicly traded stocks, but more than 50% of the money is invested in just the top four holdings. Regulation, however, precludes mutual funds from concentrating their holdings to such an extent.

The Poster said...

I am surprise that only 58% of a typical HF assets are invested in the 10 largest holdings. I would have thought that the share would be higher for a simple reason. If a HF has top-5 investment ideas, why not concentrate its portfolio in them rather than invest in 10 or 20 more lesser convincing ideas? IMHO diversification is not investment, it is portflio allocation - HF are in the business of investment not portfolio investment.

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