Day Two of Terrapinn’s annual “Alternative Beta and Hedge Fund Replication” conference in New York kicked-off this morning with an appeal from MIT’s Andrew Lo for hedge fund managers and hedge fund “replicators” to lay down their weapons.   As he wrote in a recent article on the topic:

“…hedge fund beta replication is neither better nor worse than direct investments in hedge funds-it is simply different because replication strategies trade off the full return of hedge funds for improved transparency, liquidity, capacity, and fees.”

Thinking of firing your hedge fund manager for being long Lehman?  No worries, argued Lo.  You can use hedge fund “clones” as a transition tool so you can maintain your exposure to their strategy while you search for another manager.

Have to invest $3 billion in hedge funds quickly and the best hedge funds are all closed to new investments?  Again, no worries.  Lo told the audience this morning that hedge fund replication products are a valid alternative even though they lack the alpha of the world’s elite managers.

In other words, argued Lo, hedge fund replication addresses investors’ extra-economic needs.  While they may not provide true alpha, they remain an elegant solution that just needs to applied to the right problem.

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