Replication de fonds de couverture

04 Feb 2008

As we pointed out in a posting a couple of weeks ago, there seems to be a little je ne sais quoi in the water in Montreal that breeds hedge fund replication providers.  Today, Montreal-based Pierre Saint-Laurent, head of the Canadian chapter of the CAIA Association weighs in on why the city founded by sailors in 1642 is now making waves in the hedge fund world.

Why Montreal is such a hotbed of hedge fund replication research

Special to by: Pierre Saint-Laurent, CFA, CAIA, president of AssetCounsel Inc. and head of the Canadian chapter of the CAIA Association

Alternative investments, and hedge funds in particular, have raked in the assets so far in the 21st century because of low returns from traditional strategies, pension fund deficits, an urge to diversify (and maintain low correlations even when all traditional asset classes spike, such as in the tech meltdown) and somewhat of a ‘nothing works anymore’ mindset.

Indeed, investors seem to like alternatives so much that they are willing to deal with lower transparency, hard-to-explain strategies, and (arguably) higher fees.  There’s a reason for all that: alternative asset managers, and hedge fund managers in particular, need the secrecy and privacy to move quickly and efficiently.

That’s essentially what Alan Greenspan alludes to in his autobiography, The Age of Turbulence.  The former Fed Chairman states that hedge fund regulation should not be increased, as this would destroy the nimbleness of alternative strategies.  Moreover, reporting fund activity to authorities would be a joke – the positions in the fund would have changed by the time the printer’s ink was dry, according to the erstwhile-clarinetist-turned-Most-Powerful-Man-in-The-World.

But not everyone seems to agree – some, for pure academic research reasons (i.e., climbing the Everest for no other reason than ‘that it is there’) and some for more profit-oriented reasons.  Ergo, alternatives to alternatives have now emerged.

First, we saw the rise of hedge fund indices.  These leveraged the old ETF argument – Why buy index-hugging active management when you can buy beta and pay low, low fees?  While enticing there are problems with this approach.  To begin with, there is no consensus on which indices are ‘better’ or ‘more representative’.  In addition, there really is no such thing as a passive hedge fund index when every index component is actively managed.

Then short-extension strategies such as 130/30 promised to provide “hedge fund lite”.  This is really just one strategy among a whole range of possible approaches involving short positions.  1X0/X0 is awfully compelling, but it does not capture the myriad of hedge fund alphas and betas contained in bona fide hedge fund strategies.

And now we have “hedge fund replication” – the high road to the Himalayas.  Put on your thinking cap here, as the methodologies and advances first need to be cleared in academic finance journals before they come to an investor near you. has extensively covered this phenomenon.  So I won’t repeat what you already know.  Let me instead share with you why my hometown of Montreal, Canada seems to be turning into a hotbed of hedge fund replication research…

Montreal is on the hedge fund replication map due to two innovative researchers, two pioneering institutions, and a strong belief that hedge fund replication may change what is meant by alternative investing.

Nicolas Papageorgiou and Bruno Remillard are professors at HEC Montreal (where I also teach) and bring together highly complementary expertise.  Papageorgiou is trained in finance, and he has studied hedge fund replication concepts at the highest levels, in the U.K.  Remillard brings to the table his world-class abilities in statistics and probability – and in particular in the field of “copulas” and other statistical dependence methods. 

Along with European researchers, their work is truly leading-edge.  They turn the investing problem on its head and custom-design a synthetic investment with the right return/risk/correlation properties to effectively complement and diversify existing institutional portfolios.  As regular readers of this site will know, the resulting investment is 100% synthetic – not a basket of existing risk factors. 

Two Montreal-based institutions have kept a keen eye on these academics: Desjardins Global Asset Management and Innocap.  Desjardins Global Asset Management is one of Canada’s largest alternative investment units and is backstopping the duo’s leading-edge hedge fund replication research; it has launched a fund to apply the unique distributional methodology developed in academe (see related posting). 

Meanwhile, Innocap, a Montreal-based hedge fund manager, is supporting Remillard’s efforts in another compelling area – the application of advanced filters (e.g. “Kalman filters”) to the task of tracking asymmetries, non-linearities and non-stationarity to effectively understand and replicate price behavior through time.  Innocap also has a fund that applies this approach (see related posting).

But why Montreal?  Opinions on this question vary.  But my experience suggests to me that the city combines a very significant world-class investor and manager (the Caisse de Dépôt et Placement du Quebec), a strong silent financial services organization that enjoys huge popular support and loyalty from Quebeckers (the Desjardins movement), and excellent universities with internationally-trained academics.  These factors have combined to create a culture of innovation and excellence in finance in Montreal.  Moreover, investors in Quebec have long been known for their open-minded approach to new financial instruments.  The sell-side in Quebec has always been an ‘early adopter’ of alternative investments, derivatives, and other advanced financial products.  Finally, Quebec is home to a higher concentration of financial power than many other places, providing it with the luxury of a highly focused approach to innovation.

As a result of all this, Quebec’s institutions tend to actively support the type of leading-edge, ‘critical-mass’ development seen in areas such as hedge fund replication.  The Quebec ‘keiretsu’ (for want of a better moniker) seems to be delivering results.

– PSL, February 2, 2008

Note: The opinions expressed in this guest posting are those of the author and not necessarily those of

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  1. Simon
    February 4, 2008 at 8:35 pm

    Very interesting text 9.510, I appreciate the whole viewpoint Mr Saint-Laurent.

    If I resume what Mr Saint-Laurent said in Allaboutalpha’s terms; Montreal have a low Alpha average, Montreal is under-evaluated by financial analysts and media in general. There are underdogs Quants very open-mind out there. They were also early adopters of alternative investments.


  2. Guy Albert Carbonneau
    March 26, 2009 at 12:45 pm

    It’s a very interesting essay indeed ! Actually I’ve found one french canadian organization that help individual investors create and manage their own custom-made hedge funds, and i’m telling, it really works. Their website :

    Guy A. Carbonneau

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