Funds of Hedge Funds' Portfolio Construction and the Role of Cypriot Market in a European Diversified Portfolio

During the last decade the exposure of institutional investors to FOHFs has increased strongly, inside the hedge funds industry because of diversification opportunities despite the poor value they deliver. Among the diversification choices at the heart of portfolio construction, there is the geographical focus: despite a high diversification by asset, FOHFs managers prefer to invest in nearby hedge funds because information availability. Nonetheless, little is known on geographical diversification without US focus and on the contribution of the single country. By looking at hedge funds from United Kingdom, Ireland and Cyprus, results show that geographical diversification matters for FOHFs. In particular, funds based in Cyprus do not outperform with respect to other market independently with respect to the RAP measure selected, but they are useful for constructing FOHF especially if investors aim to reduce the systemic risk, tracking error or downside risk exposure.