Who Needs Hedge Funds? A Copula-Based Technique for Hedge Fund Replication
| Nov 28th, 2006 | Filed under: Academic Research, Alternative Beta & Hedge Fund Replication | By: Alpha Male |
|
By: Harry Kat & Helder Palaro, Cass Business School, City University London
Published: November 23, 2005
Kat & Palaro’s hedge fund replication technique was first introduced in this 2005 paper. In it, they chronicle the performance-fueled genesis of today’s hedge fund industry and then juxtapose this against the recent trend toward hedge funds as a diversifier, not simply a return enhancer.
This reliance on hedge funds’ diversification properties, however, exposed the industry’s delicate underbelly – the ability to approximate these uncorrelated returns by using various, highly ubiquitous, passive investments or even by just dynamic trading strategies. And if hedge funds could be replicated using highly transparent and liquid passive tools or trading strategies, then investors wouldn’t have to worry about expensive due diligence, lock-ups, style-drift, transparency and capacity limitations – not to mention management & performance fees.
Like many papers of its ilk, this one references Sharpe’s seminal 1992 style analysis research. But Kat & Palaro find that a simple factor model has significant shortcomings:
To continue reading this article please login (at the right) or click here to learn more about accessing our archives.
Related Posts
- Superstars or Average Joes? A Replication-Based Performance Evaluation Of 1917 Individual Hedge Funds
- Manager finds factor-replication “blunt” and distributional-replication “suspiciously opaque” – advocates mechanical trading instead
- EDHEC Presents Much-Anticipated Hedge Fund Replication Study in Geneva
- Modified Kat-Palaro HF replication model heralds entry of major new competitor
- New Deutsche Bank hedge fund replication offering gets both laurels and darts
[...] Who Needs Hedge Funds? A Copula-Based Technique for Hedge Fund Replication [...]
[...] of 6 to 7 percent after fees for the average hedge fund studied. Sound realistic? Update: The All About Alpha blog has included a link to Kat and Palaro’s research papers on hedge fund returns. To read [...]
[...] of 6 to 7 percent after fees for the average hedge fund studied. Sound realistic? Update: The All About Alpha blog has included a link to Kat and Palaro’s research papers on hedge fund returns. To read [...]