“Homemade Hedge Funds”: Delicious but deadly?
| Jan 8th, 2008 | Filed under: Alternative Beta & Hedge Fund Replication, CAPM / Alpha Theory | By: Alpha Male |
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As investors attempt to look behind the hedge fund wizards’ curtains to see how they perform their tricks, there is a significant amount of interest in “do it yourself” or “homemade” hedge funds. This Business Week cover story from late 2005 is a great example (check out the rather heated comments too).  During the ensuing 2 years, “homemade hedge funds” came to be known as “hedge fund replication”.
But most of the debate surrounding “hedge fund replication” has involved the use of futures, swaps, mechanical trading strategies, derivatives.  But most investors simply don’t have these tools lying around at home.  So an asset manager and an academic from Howard University recently teamed up to see if you could actually replicate hedge fund returns using the most common of household appliances – the sector ETF.
In “Homemade Sector Hedge Funds: Can Investors Replicate the Returns Without Paying the Fees?” Lorenzo Newsome of Xavier Capital Management and Pamela Turner of Brown University say this has never actually been tried before. (Their paper appears in this quarter’s Journal of Investing and can also be downloaded here.) Say the duo:
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