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Portfolio Strategy

Rethinking Risk: How diversification amplifies selection skill

The second paper in our Rethinking Risk series delves into the relative impact of skill and diversification on the distribution of outcomes from private equity portfolios, as an increasing number of investors seek to reduce their exposure to a few, select funds.

Leveraging our proprietary dataset of historical fund performance, this paper compares the potential return outcomes from concentrated and diversified private equity portfolios with varying levels of modeled investment skill, finding that the inherent advantages of a diversified portfolio are difficult to overcome with a concentrated approach. Furthermore, our modeling shows that if you are a truly skilled investor, you would be better off combining your skill with broad diversification.

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