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Alternative Investments
Hedge Fund Replication

Authors: Editors: Greg N. Gregoriou, Maher Kooli
Editions: Palgrave Macmillan
Pages: 224 pages
Date: November 2011
The popular academic conception that hedge fund returns are simply beta in alpha clothing is an important case for passive replication of hedge fund returns. If much of the returns of hedge funds are not true alpha but rather beta, it could make more sense to replicate them rather than to invest directly in hedge funds. Furthermore, with many hedge fund managers now requiring longer lock-up periods, hedge fund clones have also been marketed as a more liquid alternative or as a temporary investment in a passively managed hedge fund until a suitable fund manager can be found. In addition to lower fees and ease of trading, hedge fund clones also offer transparency. Investors generally know what is inside a clone's portfolio, whereas traditional hedge funds are considered as black box. However, while there may be a consensus in the industry that hedge funds clones will bring better liquidity and lower fees, it is still debatable whether replication products should serve as a complement in the hedge fund allocation decision or as a replacement. Many financial experts also consider hedge fund clones as unproven and risky for investors.

The hedge fund clone industry remains very much in the embryonic stage and more academic research is needed in order for the market to gain more confidence in such products. Interestingly, hedge fund clones while heterogeneous in nature have performed relatively well during the recent financial crisis.

This book offers the reader valuable insights into the thinking behind hedge fund replication. It comprises a collection of views and research from specialist practitioners and academics from around the world, to shed light on different issues regarding the construction of hedge fund clones and how we should consider them. It analyses their pros and cons, and considers the question, "Do they really expand the efficient frontier for investors?".

About the Editors:

Greg N. Gregoriou is the author of numerous published books, book chapters and refereed journal papers. He has also been quoted several times in the New York Times and the Financial Times of London. Professor Gregoriou is hedge fund editor and editorial board member for the Journal of Derivatives and Hedge Funds, as well as editorial board member for the Journal of Wealth Management, the Journal of Risk Management in Financial Institutions, Market Integrity, IEB International Journal of Finance, and the Brazilian Business Review. Professor Gregoriou's interests focus on hedge funds, funds of funds, and CTAs. He is a Research Associate with EDHEC-Risk Institute in Nice, France.

Maher Kooli is Professor of Finance at the School of Management, Université du Québec à Montreal (UQAM), Canada. He is also the finance graduate programs director and in charge of the Trading room at UQAM. He holds a Ph.D. in finance from Laval University (Quebec), Canada, and was a postdoctoral researcher in finance at the Center of Interuniversity Research and Analysis on Organisations. Professor Kooli also worked as a Senior Research Advisor for La Caisse de Dépôt et Placement de Québec (CDP Capital). He has published articles in a wide variety of books and journals.