What About “Mutual Fund Replication”?
Feb 25th, 2007 | Filed under: Alternative Beta & Hedge Fund ReplicationWe’ve covered a lot of developments in the so-called “hedge fund replication” field. But switching gears now, we’d like to look at what amounts to “mutual fund replication”. Sure, hedge funds aim to provide a high proportion of alpha in their returns, but hedge funds don’t have a monopoly on alpha. In fact, as the chart in Friday’s posting clearly illustrates, many mutual funds actually have a lower correlation to traditional asset classes than do mutual funds (and therefore a higher proportion of potentially “replicatable” alpha in their returns than many hedge funds).
Conversely, that chart also shows that many hedge funds have a remarkably high correlation to traditional asset classes - suggesting that a relatively small proportion of those returns are alpha. At the end of the day, hedge funds and mutual funds are in the same game - finding new sources of returns before those returns are “replicated” by ETFs, liquid derivatives, or “hedge fund replicators”. In other words, it’s not about “hedge” vs. “mutual”. It’s all about active management.
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