Hedge fund replication is “imitation crab meat” according to major hedge fund company
Feb 9th, 2007 | Filed under: Alternative Beta & Hedge Fund ReplicationApparently, there are different takes on hedge fund replication - as evidenced by the contrasting views of AlphaSwiss Group and Professor Harry Kat. But a vigilent reader of AllAboutAlpha recently sent us the Q4 investor letter from a prominent fund of hedge funds company that contained a third point of view. In the letter, the firm makes it quite clear it is not amused by any form of hedge fund replication.
The firm did not return calls to AllAboutAlpha regarding the letter. But the following excerpt speaks for itself (and wins full marks for creativity):
Imitation Crab Meat is the central ingredient in California Rolls dispensed at discount sushi establishments throughout the world. In December, the US Food and Drug Administration agreed to allow the seafood industry to remove the ‘imitation’ label and instead refer to the product by its catchier moniker, ‘Surimi’. The processed fish was developed after several years of research by Messrs. Y. Sugino and K.Osakai, who devised a multi-factor process to combine cryoprotectant materials such as sorbitol with other texturing agents, flavorants and colorants to replicate the sought-after features of real crab meat.
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[…] Fung’s research corroborates what the industry has sensed for some time now: that investable hedge fund indexes under perform their non-investable peers.  Even when adjusted for management fees, the investable CSFB, HFRI and MSCI still under performed the non-investable versions of these funds (see recent post on one manager who royally panned these investable products).  Fung proposes another method of capturing alternative betas that might not succumb to the “certain balls and chains†that seem to stymie the existing investable indexes. The manacles to which Fung refers include: high fees, opacity, illiquidity, and hedge fund risk […]