AAA Exclusive: An Interview with Managers of the World’s Newest Hedge Fund Replication Product
Jan 17th, 2008 | Filed under: Alternative Beta & Hedge Fund Replication
There’s something in the water in Montreal, Canada. Montreal-based Innocap, a division of the National Bank of Canada that manages approximately $3b in hedge funds, announced earlier today that it has entered the field of hedge fund replication in partnership with BNP Paribas. In fact, they’ve quietly been managing a product since July and are now ready to go public with it. As you may remember, it was only last fall that fellow Montrealers over at Desjardins Group went public with a fund that uses a form of “distributional replication” very similar to that used by Professor Harry Kat in London (see related posting). We were the first to publish news of that offering and we are now pleased to bring you the first interview with the managers of National Bank’s new entrant - ”Salto”.
Unlike Desjardins, Innocap is pursuing the more mainstream ”factor replication” approach. But the firm believes its particular take on the process is unique. The fund is based on a mathematical idea called “advanced filtering” borrowed from, among other fields, missile interception. The fund is designed to track the MSCI Hedge Fund Composite Index. A companion fund, “Verso” is designed to have a -1.0 correlation with the same index.
The Co-CEO of Innocap, Martin Gagnon, and the firm’s Managing Director of R&D Pierre Laroche spoke with us earlier today about the product, its rationale and its Genesis.
Gentlemen, let me start by asking you what you believe is causing all the recent interest in hedge fund replication. More…
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I love the marketing gimmick being played by this fund, and others of its ilk. “We’ll match the hedge fund ‘beta’ and return stream, but be transparent and less expensive, so PLEASE mister institution, place your ‘alternative’ allocation with US!”
Here’s another idea. Use the same approach, but rather than model an index, model a **constant** return!, and market it as a “whole enchilada” approach where someone could potentially put ALL of their money.
They could still market it as an alternative investment. Think about it †if they can achieve close to a constant monthly return stream, it is by default a non-correlated return stream when compared to **any other asset class** - and thus, a pretty good deal.