How is the performance of Diversified FoF generally characterized?

The performance of a Diversified Fund of Funds (FoF) is generally characterized by negative skewness with positive excess kurtosis in the return distribution. This characteristic indicates that the returns may experience occasional large losses, which is reflected in the negative skewness, while the presence of positive excess kurtosis suggests a higher likelihood of extreme outcomes compared to a normal distribution. This means that, while there can be substantial periods of underperformance, there is also the potential for significant positive returns.

Fund of Funds typically allocate capital across a variety of underlying hedge funds and alternative investments, which can lead to diverse return profiles. However, because they often include strategies that may perform poorly in certain market conditions or exhibit tail risk, the distribution of returns is skewed to the left (negative skewness). The positive excess kurtosis further emphasizes that there are more extreme deviations from the mean return than one would expect in a normal distribution, indicating potential for both large gains and significant losses.

This understanding helps investors to gauge the risk-return profile of Diversified FoF and manage their expectations regarding performance across different market environments.