Hedge Fund Replication: Thoughts from the "Engine Room"
Feb 20th, 2007 | Filed under: Alternative Beta & Hedge Fund ReplicationA senior executive with a multi-billion dollar hedge fund firm writes us with reflections on last week’s “Hedge Fund Replication and Alternative Beta” conference in London.
Dear (Alpha Male),
…a few thoughts regarding the wonderful world of replication:
1) Just what is being replicated? My understanding - limited so far - is that Fung, Hsieh, Kat, et al are modelling HF returns net of fees. The utility to the end investor will be the same as if they were paying large fees to a hedge fund manager. The saving on fees does not lead to higher returns to the investor. This has been conveniently overlooked.
2) Why all managers should embrace the cloning: We have a problem demonstrating our skill (alpha) to investors. Skill is not the same as performance. The ‘clones’ / ‘replicated indices’ / ’simple models’ / ‘call-them-what-you-will’ will give us a common benchmark to measure our skill against. There is a large dispersion of ability in the manager universe. A benchmark will allow good alpha generating managers to differentiate themselves from bad managers. This should be a positive thing for good managers, all investors & bad managers (who can find gainful and fulfilling employment elsewhere!).
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[…] The early spin deserves both laurels and darts.  Deutsche Bank deserves kudos for addressing a common concern about hedge fund replication offerings - that they only attempt to replicate hedge fund returns after fees. There are those who feel that this might be okay if those suppliers didn’t also attack hedge funds for charging too much. After a landmark event on hedge fund replication in London last winter, one reader wrote us to express several concerns. One of those concerns read as follows: “Just what is being replicated? My understanding…is that (hedge fund replicators) are modeling HF returns net of fees. The utility to the end investor will be the same as if they were paying large fees to a hedge fund manager. The saving on fees does not lead to higher returns to the investor. This has been conveniently overlooked.” […]