HHI Concentration Calculator

Understanding the Herfindahl-Hirschman Index (HHI)

The Herfindahl-Hirschman Index (HHI) is a commonly accepted measure of market concentration and portfolio diversification. Originally developed to identify monopolies in economics, it is widely used in finance to determine how concentrated a portfolio is across different assets, sectors, or strategies.

The Mathematical Formula:
The HHI is calculated by squaring the market share (or portfolio weight) of each asset and summing the resulting numbers.
HHI = s₁² + s₂² + s₃² + ... + sₙ²
Where s is the percentage share of each asset in the total portfolio (expressed as a whole number, e.g., 50 for 50%).

A lower HHI score indicates a well-diversified portfolio, meaning risk is spread across multiple assets. A higher HHI indicates high concentration, meaning the portfolio's performance is heavily dependent on a few large positions. Generally, an HHI below 1,500 is considered well-diversified, while an HHI above 2,500 is highly concentrated. By actively tracking HHI, investors can protect their downside and achieve a more optimal risk-adjusted return profile.

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