We decompose hedge fund tail risk into two components: Systematic Conditional Tail Risk (SCTR) arising predictably from equity market exposure, and Idiosyncratic Conditional Tail Risk (ICTR) arising from proprietary investment technology. Using option holdings data, we demonstrate that low-SCTR...

We analyze the diversification choices of fund of hedge fund managers. Diversification is not a free lunch. It is not available for every fund of fund. Instead we find a positive log-linear relation between the number of constituent funds in a fund of hedge fund (n) and the respective assets...

Using a representative sample of 13F reports providing novel information on option characteristics and prices, we document that hedge funds prefer to hold liquid high–embedded leverage options without lottery-like skewness. Various portfolios mimicking hedge funds' option holdings earn...