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”.
To continue reading this article please login (at the right) or click here to learn more about accessing our archives.
I think I read someone suggest, some time ago in your comments section, that the best use of these “replication” tools is probably the targeting of stable, constant return streams, rather than trying to mimic an index of hedge fund returns.
Go Kat!
[…] “(O)nly 20% of hedge funds add value after fees.” (All About Alpha) […]
[…] AAA Exclusive: An interview with Prof. Harry Kat about his newest project, “super-diversification†[…]