AAA Exclusive: An interview with Prof. Harry Kat about his newest project, “super-diversification”
Feb 11th, 2008 | Filed under: Alternative Beta & Hedge Fund ReplicationOn October 21, we commented that Professor Harry Kat, developer of a “hedge fund replication” technique commonly called “distributional replication”, seemed to downplay his tool’s usage in replicating hedge fund returns and emphasized how it can instead be used as a risk management technique.
“He’s apparently trying to move away from a direct attack on hedge funds and is instead proposing that his dynamic trading method can and should be used to create custom return distributions to complement existing long-only portfolios.”
Well today German-based Aquila Capital, a 1.5 billion Euro manager of alternative investments, did just this. They announced the launch of a market neutral fund that uses Kat’s technique as a risk management overlay. According to the firm’s press release, its Statistical Value Market Neutral (SVMN) fund uses ”a combination of multi-asset investing and a behaviorally driven tactical asset allocation overlay” to actually generate alpha. Then it uses Kat & Palaro’s “FundCreator” software ”to ensure a stable and predictable risk profile over time”. Specifically, this means the fund is designed to have a volatility of 7%, a skew and kurtosis of zero and a correlation to the S&P 500 of zero. In addition, the fund aims to deliver a maximum monthly drawdown of 4%. The zero correlation to the S&P 500 provides what Aquila calls “super-diversification”.
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