Niche Funds Are Ok?

from the focus-focus-focus dept

The common wisdom these days is that diversification is a good thing. Then why is it that niche VC funds that focus on specific areas seem to get better returns than more broadly focused funds? This Red Herring article suggests a few possibilities. They say that the fund managers generally have more knowledge and experience in those fields, and thus make better bets - plus there is often less competition in the niche they're focused on. I'm not sure I believe all of this - and it certainly doesn't seem backed up by any actual quantitative research, but just anecdotally. The fact is, that without diversification, if you do hit it big, you'll hit it bigger than a diversified fund - since all your investments tend to go way up. However, if you don't hit it big you become a failure pretty quickly and disappear. The point of diversifying is that you give up a little bit of the upside potential in order to protect yourself (hopefully) on the downside.

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