Recent performance of HF clones shows they “were attractive during the crises of 2008″
Sep 9th, 2009 | Filed under: Alternative Beta & Hedge Fund Replication, Today's Post
Ah, the good old days – when the hedge fund “secret sauce” was revealed and suppliers set about developing the products that would bring it to investors the world over under the moniker “hedge fund cloning”. But as Swiss researchers Erik Wallerstein, Nils Tuchschmid and Sassan Zakerc note in a recent paper called “How do hedge fund clones manage the real world?”:
“Some years ago hedge fund replication was a much discussed topic on the hedge fund horizon. A credit crunch and some hedge fund Ponzi schemes later, the attention has turned elsewhere. 2008 performance of broad hedge fund indices where dismal at best. This did not bode well for selling pitches to persuade investors to turn to funds which replicate this performance.”
However, the trio goes on to argue that the $2 billion hedge fund replication business is far from dead. Hedge fund replicas, they say, “…have several unique and interesting features, many which where attractive during the crises of 2008.”
They analyze the recent performance of 21 hedge fund clones from 17 companies covering the full spectrum of replication techniques from factor replication to distributional replication to mechanical replication. (see the “Alternative Beta and Hedge Fund Replication” category at the right side of this page for extensive coverage of these topics).
Here’s how the 21 fund stack up from March 2008 to May 2009 (chart based on data in paper)… More…
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As the “father” of distributional replication, I am extremely happy with this research paper. Being more complex than other techniques, distributional replication has been slow gaining acceptance. Now, however, we have the real life performance of 2 products based on it defying all criticism and clearly showing how robust the technology is. Quoting from the paper (page 9): ” the two (products) based
on distribution approach are singled out as to have the highest returns and belonging to the group of four products with the lowest volatility.” It is important to note that there are big differences between both products though. Fully in line with its explicit risk targets, the Aquila Capital SVMN fund, which uses our FundCreator risk management system, generated zero correlation with stocks, bonds and commodities. The DGAM product on the other hand exhibited very high correlation with these asset classes, much in line with other replication products. Building good diversifiers is not as simple as most people think
[...] allaboutalpha Ah, the good old days – when the hedge fund “secret sauce” was revealed and suppliers set about developing the products that would bring it to investors the world over under the moniker “hedge fund cloning”. But as Swiss researchers Erik Wallerstein, Nils Tuchschmid and Sassan Zakerc note in a recent paper called “How do hedge fund clones manage the real world?”: [...]
In September 2009, TrueBeta launched its independent hedge fund replicator.
The express objective of TrueBeta is to replicate the performance of the hedge fund industry, no to beat it (referring to your comment above). Simplicity and transparency of methodology and construction are also specific design objectives.
Correlation with the HFRI equal weighted composite over a 5-year period is 0.93, with an annualized tracking error of 3.07%. Skewness and kurtosis are virtually identical to the HFRI index.
You can find more detail on methodology and performance on http://www.true-beta.com.
Sincerely
Rabbe Ekholm
A good paper from independant researchers. The message is clear: HF index replicators are certainly worth looking at. Also, I can add that we see more and more FoHF managers using them to manage their excess cash or as the core components of core-satellite FoHF that offer more efficient exposure to the HF industry.
Pierre Laroche
Innocap Investment Management