Hedge fund replication has been touted as a way to avoid paying “excessive” hedge fund fees, get better liquidity, and even to achieve higher returns than actual hedge funds.  But a new report by Merrill Lynch makes an argument that hits close to home for many pensions and endowments.  The report says that hedge fund replication is a way to avoid headline risk (see HedgeWorld premium story reprinted here with permission).

Funds of funds managers, this is targeted squarely at one of the key planks in your platform: career survival.  While it’s not a huge leap from other elements of the hedge fund replication value proposion (e.g. “better liquidity” or “transparency”), it suggests that replicators may be making a more direct assault on funds of funds.

But before hedge fund replicators and funds of funds pick up and move to separate gated communities and join separate country clubs, we thought we should have a look at the report.  (Apologies to all of our readers for referencing a pay-per-view report - which is not something we like to do – but Merrill put the kibosh on freebie research back in March.)

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