With hedge fund performance starting to look up, a reader recently suggested we check up on the trials and tribulations of “hedge fund replicators” – those who aim to clone the returns of hedge funds via passive exposure to highly liquid and ubiquitous investments.  The most well understood method of doing is to use a factor model based on a trailing regression of hedge fund industry returns.  One of the most prominent players in this space is probably Merrill Lynch, purveyors of the “Merrill Lynch Factor Model” (factor model website).

The firm describes the index this way in its marketing sheet: More…