How many hedge funds do concentrated funds of hedge funds typically allocate assets to?

• A. 15 to 20
• B. 30 to 50
• C. 5 to 10
• D. 1 to 5

Answer: (C)

Concentrated funds of hedge funds typically allocate assets to a smaller number of hedge funds, generally in the range of 5 to 10. This approach allows for a more focused investment strategy where the fund manager can conduct in-depth research and maintain close relationships with the few selected hedge fund managers. By limiting the number of investments, concentrated funds look to maximize their return on investment by targeting specific strategies or funds believed to have the most significant potential for outperformance.

This concentrated strategy contrasts with more diversified funds of hedge funds, which tend to spread investments across a larger number of hedge funds (usually 30 to 50 or more) to mitigate risk. Concentrated allocation can be more suitable for investors who are comfortable with the higher risk associated with fewer investments and have strong conviction in the selected hedge funds' ability to generate alpha.