Synthetic Replication of a Mutual Fund Using “Off-the-Shelf” Alpha, Beta, and Leverage
| Jul 6th, 2006 | Filed under: Portable Alpha & Alpha/Beta Separation, Retail Investing | By: Alpha Male |
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By: Alpha Male
A friend recently asked me to analyze his firm’s equity mutual fund on the basis of it’s alpha component. What proportion of the fund could be represented by an ETF, by cash (or borrowed cash), and by a market neutral overlay (a.k.a. “the embedded hedge fund”)? If we assume a smal fee for the embedded ETF, what is the implicit fee for the embedded hedge fund? How does this compare to other equity funds in the same class? To answer these questions, I used a technique similar to that used by Professor Ross Miller at the State University of New York in August 2005. I post my rough notes below to spark discussion on this technique, not to present any final conclusions or results. The techniques used form the basis of a white paper in progress and a companion analytical tool currently under development.
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