New Edhec HF Replication Research in Limited Release Today
Jun 27th, 2007 | Filed under: Alternative Beta & Hedge Fund Replication
Owing in part to its tremendously prolific promotional department, few in the hedge fund industry are unaware that EDHEC Risk and Asset Management Research Centre - an off-shoot of the renowned Edhec Business School in France - is releasing its latest research on hedge fund replication today (Thursday) at a seminar in London. The paper’s title summarizes Edhec’s take on the state of the replication world today: “The Myths and Limits of Passive Hedge Fund Replication: An Attractive Concept…Still a Work in Progress”.
While the full paper isn’t yet available to the public, our friends at Edhec have provided AllAboutAlpha.com with an copy so we can give you some of the main points.
Overall, we find it to be a very good survey of the state of the replication field. In the words of the authors, Noel Amenc, Walter Gehin, Lionel Martellini (Hall of Fame, related posting), and Jean-Christophe Meyfredi:
“The purpose of this position paper is to provide an in-depth analysis of the subject, with an emphasis on the findings based on the last ten years of academic research on hedge fund performance analysis and replication, and a discussion of the implementation challenges related to a commercial offering based on these concepts.”
The paper reaches two broad conclusions:
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“Since academic attempts to design factor models for hedge fund return replication have so far been unable to generate fully satisfactory results, the recent launch of a number of industry initiatives is perhaps surprising.â€
Perhaps more suprising is that the authors so casually dismiss the results of so many other researchers. Could it be that the results attained by Goldman, Merrill, JP Morgan, Deutsche, Partners Group, MIT, Stonebrook, and others could actually be correct and Edhec wrong?
Such is the problem with such proprietary “research”. It isn’t subject to peer review so other researchers can’t judge it’s claims.
I, along with others have done the factor-based research and attained markedly different results out-of-sample. I think Edhec needs to revisit their results.
Edhec is very good publishing studies that dismiss others’. However, it is very difficult to replicate exactly what IB have done and even harder the work done by Kat. There is always a secret ingredient in each recipe that makes it hard to “replicate”.
I also have worked on the linear case using my secret sauce and some results are encouraging.
If we were all following what Edhec is saying since the beginning, the entire replication concept wouldn’t be alive yet…