Why hedge fund replication might be giving you a deja vu
| Apr 24th, 2007 | Filed under: Alternative Beta & Hedge Fund Replication | By: Alpha Male |
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In case you don’t usually read the bi-monthly report “Financial Stability Review” from the Banque de France, you might be interested to know that April’s edition (now on newsstands everywhere) is dedicated to hedge funds. A portion of it dealing with hedge fund replication has interesting parallels to the mutual fund industry.
Professors Bill Fung and David Hsieh provide their usual commentary on hedge fund replication for the report (not that dissimilar to their report to the Federal Reserve last year). But buried in the “state of the industry” treatise is a nuanced argument about the very raison d’etre for hedge fund replication. Essentially, Fung & Hsieh advocate hedge fund replication as a way to keep managers honest. In other words, (cheap) hedge fund replication can and should be used as a benchmark to accurately define true alpha. But ironically, argues the duo, investable hedge fund replication fees have been marked to prevailing hedge fund fees, not the other way around. In their report, they conclude:
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