What is asset allocation?

Asset allocation refers to the way in which a money market fund, retirement fund, hedge fund, etc. partitions its available funds into different types of investments, such as stocks, bonds, mortgage-backed securities, credit default swaps, cash, etc. The central goal of most asset allocation schemes is to reduce the risk of the overall portfolio by investing in a variety of places, so as to not put all of one's eggs in one basket. Hedge funds in particular, try to match covariance (for example, the tendency of two stocks to move together) of different investments so as to actively bring the risk of the overall portfolio is close to zero as possible.