Hedge Fund Replication

The popular academic conception that hedge fund returns are simply beta in alpha clothing is an important case for passive replication of hedge fund returns. If much of the returns of hedge funds are not true alpha but rather beta, it could make more sense to replicate them rather than to invest directly in hedge funds. Furthermore, with many hedge fund managers now requiring longer lock-up periods, hedge fund clones have also been marketed as a more liquid alternative or as a temporary investment in a passively managed hedge fund until a suitable fund manager can be found. In addition to lower fees and ease of trading, hedge fund clones also offer transparency. Investors generally know what is inside a clone's portfolio, whereas traditional hedge funds are considered as black box. However, while there may be a consensus in the industry that hedge funds clones will bring better liquidity and lower fees, it is still debatable whether replication products should serve as a complement in the hedge fund allocation decision or as a replacement. Many financial experts also consider hedge fund clones as unproven and risky for investors. The hedge fund clone industry remains very much in the embryonic stage and more academic research is needed in order for the market to gain more confidence in such products. Interestingly, hedge fund clones while heterogeneous in nature have performed relatively well during the recent financial crisis. This book offers the reader valuable insights into the thinking behind hedge fund replication. It comprises a collection of views and research from specialist practitioners and academics from around the world, to shed light on different issues regarding the construction of hedge fund clones and how we should consider them. It analyses their pros and cons, and considers the question, 'Do they really expand the efficient frontier for investors?' Front Matter....Pages i-xxiv Can We Really “Clone” Hedge Fund Returns? Further Evidence....Pages 1-14 Hedge Fund Replication: Does Model Combination Help?....Pages 15-29 Factor-Based Hedge Fund Replication with Risk Constraints....Pages 30-47 Takeover Probabilities and the Opportunities for Hedge Funds and Hedge Fund Replication to Produce Abnormal Gains....Pages 48-60 Benchmarking of Replicated Hedge Funds....Pages 61-75 Insight—Distributional Hedge Fund Replication via State Contingent Stochastic Dominance....Pages 76-89 Nonparametric Hedge Funds and Replication Indices Performance Analysis: A Robust Directional Application....Pages 90-105 Hedge Fund Cloning through State Space Models....Pages 106-118 Hedge Fund Return Replication via Learning Models....Pages 119-132 Linear Model for Passive Hedge Fund Replication....Pages 133-145 Can Hedge Fund-Like Returns be Replicated in a Regulated Environment?....Pages 146-158 A Factor-Based Application to Hedge Fund Replication....Pages 159-190 Back Matter....Pages 191-193