Herfindahl-Hirschman Index (HHI)
A concentration measure, calculated by summing the squared percentage weights of each holding, used to gauge how concentrated a portfolio (or market) actually is.
The Herfindahl-Hirschman Index (HHI), originally developed to measure market concentration among competing companies, is calculated by summing the square of each holding's percentage weight — applied to a portfolio, it measures how concentrated that portfolio's allocation actually is across its individual positions.
Because weights are squared, a portfolio concentrated in a small number of large positions produces a much higher HHI than an equally-sized portfolio spread evenly across many smaller ones — a more sensitive concentration signal than simply counting the number of holdings. See Kaavon's Portfolio Concentration calculator for the full formula.
Examples
- A portfolio with one position at 80% of total value has a far higher HHI than a portfolio with ten equally-weighted 10% positions, even though both have the same number of holdings.
- HHI's squaring of each weight is specifically what makes it more sensitive to a few dominant positions than a simple holdings count would be.