Professor Harry Kat Responds to EDHEC Study on Hedge Fund Replication
Mar 15th, 2007 | Filed under: Alternative Beta & Hedge Fund ReplicationAfter yesterday’s story on EDHEC’s new hedge fund replication research, we were curious about Harry Kat’s take. With some cajoling by us, Professor Kat responds below
By: Prof. Harry Kat, Cass Business School, City University (London)
In a recent interview published at All About Alpha and a research paper presented at the Edhec Asset Management Days in Geneva on March 13, Edhec researchers make some statements with respect to the workings of and results that can be obtained from our FundCreator technology that could be misconstrued. In this note I hope to clarify a few important issues.
But first, I’d like to start with a short story that will clearly illustrate the point that I’d like to make.
Leo and Chris are walking down the High Street and suddenly notice this beautiful shiny new car. They stop to take a closer look. What is it? says Leo.
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I enjoyed the good professor´s response to his critics, especially this:
“…Closer to home, Leo suggests they build a Rolls Royce for themselves. Chris agrees and offers his tools and his garage as a workshop. The two go to work and by the evening (!!) their car is finished. Indeed, it looks very much like the real thing.”
Unfortunately, my suspicion is that Leo and Chris do not know the first thing about copying the object of their attention. Professor Kat´s story is fun reading but has one minor flaw: the gentlemen from EDHEC likely know a little more about their subject than do Leo and Chris (and, one imagines, took a little longer to prepare their work).
Kat´s defence of his black box (”So how can one evaluate something of which one doesn’t know what is going on inside? I think that’s simple - try it out and examine the results themselves rather than the methodology.”) has a wonderful counterpoint in Jack Schwager´s comments from the following day:
“Every problem, I don’t care what it is †whether it’s a fraud, blowup or whatever, is caused by one thing: a lack of transparency.â€
As usual, Chris, great food for thought.