With the increasing availability of open-source robotic data, imitation learning has emerged as a viable approach for both robot manipulation and locomotion. Currently, large generalized policies are trained to predict controls or trajectories using diffusion models, which have the desirable property of learning multimodal action distributions. However, generalizability comes with a cost - namely, larger model size and slower inference. Further, there is a known trade-off between performance and action horizon for Diffusion Policy (i.e., diffusing trajectories): fewer diffusion queries accumulate greater trajectory tracking errors. Thus, it is common practice to run these models at high inference frequency, subject to robot computational constraints. To address these limitations, we propose Latent Weight Diffusion (LWD), a method that uses diffusion to learn a distribution over policies for robotic tasks, rather than over trajectories. Our approach encodes demonstration trajectories into a latent space and then decodes them into policies using a hypernetwork. We employ a diffusion denoising model within this latent space to learn its distribution. We demonstrate that LWD can reconstruct the behaviors of the original policies that generated the trajectory dataset. LWD offers the benefits of considerably smaller policy networks during inference and requires fewer diffusion model queries. When tested on the Metaworld MT10 benchmark, LWD achieves a higher success rate compared to a vanilla multi-task policy, while using models up to ~18x smaller during inference. Additionally, since LWD generates closed-loop policies, we show that it outperforms Diffusion Policy in long action horizon settings, with reduced diffusion queries during rollout.