Abstract
Despite the importance of diversification in portfolio construction, our current methods of measuring it are inefficient. Construction of a Portfolio Diversification Index (PDI) presents a new way to understand the concept. PDI, which measures the number of unique investments in a portfolio, is useful to assess marginal and cumulative diversification benefits across asset classes and across time. Implementation in hedge fund strategies reveals that various hedge funds offer less diversification than may have been thought, and that there has been reduced diversification in the past several years
TOPICS: Portfolio construction, real assets/alternative investments/private equity, performance measurement
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