This is the first of our series of guest articles (”Alternative Viewpoints – powered by CAIA”) written by a member of the Chartered Alternative Investment Analyst Association (CAIA Association).

By: Ryan Teal, CAIA

I was watching TV the other day and an advertisement came on for the movie, The Assassination of Jesse James by the Coward Robert Ford”.  The Jesse James character muses to a young, infatuated Robert Ford, Do you want to be like me, or do you want to be me?

This is what hedge funds must feel like with hedge fund replication.  Until recently investors have been told that hedge fund returns are not properly replicable but what happens if we can not only properly replicate these returns but do so at a significantly lower cost?

Recently I was able to view slides from a Thomas Schneeweis presentation called New Product Development: Replication vs. Indexation, in which he addresses this concept by discussing new replication methods available (such as Factor-based and Security-based replication), the theoretical basis for each and results from their performance against hedge fund returns.

Schneeweis illustrates below that many investors are now finally challenging the notion that hedge funds are not a pure source of alpha but in fact consist of a significant beta, or alternative beta, component.

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