Who Needs Hedge Funds? A Copula-Based Technique for Hedge Fund Replication
Nov 28th, 2006 | Filed under: Alternative Beta & Hedge Fund ReplicationBy: Harry Kat & Helder Palaro, Cass Business School, City University London
Published: November 23, 2005
Kat & Palaro’s hedge fund replication technique was first introduced in this 2005 paper. In it, they chronicle the performance-fueled genesis of today’s hedge fund industry and then juxtapose this against the recent trend toward hedge funds as a diversifier, not simply a return enhancer.
This reliance on hedge funds’ diversification properties, however, exposed the industry’s delicate underbelly - the ability to approximate these uncorrelated returns by using various, highly ubiquitous, passive investments or even by just dynamic trading strategies. And if hedge funds could be replicated using highly transparent and liquid passive tools or trading strategies, then investors wouldn’t have to worry about expensive due diligence, lock-ups, style-drift, transparency and capacity limitations - not to mention management & performance fees.
Like many papers of its ilk, this one references Sharpe’s seminal 1992 style analysis research. But Kat & Palaro find that a simple factor model has significant shortcomings:
To continue reading this article please login (at the right) or click here to learn more about accessing our archives.
[…] Who Needs Hedge Funds? A Copula-Based Technique for Hedge Fund Replication […]