In March, we learned that a reliance on monthly data to assess hedge funds might be leading us astray.  Thomas Schneeweis, Editor of the Journal of Alternative Investments, argued that daily, or even weekly, data was far superior than monthly information.

While Schneeweis was referring to the relative advantages of managed accounts at the time, the same general theme has now made its way into the debate on hedge fund replication.  Alpha Male shared a cold one with one of the luminaries of hedge fund academia a couple of months ago (a Hall of Fame member) when said guru expressed concern over the so-called “distributional replication” approach to hedge fund cloning.  In his opinion, Kat’s reliance on monthly data to pump out daily trading instructions was a source of potentially considerable error.

Now another group of academics, backed by one of the world’s largest hedge fund investors, has attempted to address this concern.  Nicolas Papageorgiou, Bruno Remillard, and Alexandre Hocquard of Montreal’s HEC Business School have just released the first version of a paper that aims to improve on the Kat-Palaro method (available here at AllAboutAlpha.com).  Papageorgiou tells AllAboutAlpha.com that Canada’s Desjardins Global Asset Management has been quietly managing a “beta” fund since late 2006 and will be adopting this approach for an official launch in September.  So expect to see Desjardins and Papageorgiou on red carpets around the hedge fund conference circuit this Fall (including this one featuring a panel of both Papageorgiou and Kat for – with apologies to Seinfeld’s Mr. Peterman - ”a good old fashioned Kat fight“).

More…