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Browse by CategoryHome » Category List » Hedge Fund Replication
Hedge fund clones calling in reinforcements for “attack” on funds of funds21 July 2008
But now Man Investments has borrowed the term to describe not just alternative beta strategies, but also other emerging strategies such as 130/30, investible hedge fund indices and “permanent capital” (exchange-listed shares in hedge funds). What’s the common link? They amount to what Man calls “hedge fund alternatives” that address the barriers of “high fees and comparatively poor liquidity” that prevent many institutions from investing in hedge fund strategies. In a report issued this month called, “Attack of the ‘hedge fund’ clones: Investable indices, Alternative beta, 130/30, Permanent capital“, Man ties together these loosely related concepts into one framework that is similar in its intent to this 2007 article, but with a lot more detail. As a result, this white paper is a great overview of alpha-centric investing that is succinct and easy to read - especially if you like smiley face icons…
Comments »Virtual private equity a step closer to reality23 June 2008
Of course, you could always short comparable public equities (or even an index) against a long position in private equity. In fact, given the high correlation between private equity and public equity, that might not be a bad idea. There has been some research showing that a leveraged public equity position could actually trump private equity on a risk adjusted basis (see related posting). But insofar as private equity has its own return characteristics that are uncorrelated with public equity beta, it can’t truly be hedged. This may be changing soon. State Street is reportedly working on a “private equity replication” model that will complement its existing hedge fund replication model (see recent posting on that one). Eric Brandhorst, head of the research and structured products group at SSgA told Thomson last week:
Comments »Goldman’s new “A.R.T.” HF-Replication-Mutual-Fund22 June 2008
The nuts and bolts behind “ART” are a state secret, but the fund’s prospectus describes it this way:
Comments »Silos, flesh wounds, the “disintermediation” of poultry, and a call to action4 June 2008More from London (see yesterday’s posting for background)… A pension plan as a financial services firm
It turns out that this view of the hedge fund portfolio as a sort of arm’s length asset manager with only one client can also be applied to the pension fund as a whole. That’s how one major private pension fund described it to a gathering here in London today – as a “financial firm that produces pensions.” This view also has implications for “liability-driven investing” (LDI). Some said that the process of liability-matching and return-enhancing should be kept separate within this financial services firm. For example, one major pension fund here created a team focused on removing interest rate and inflation risk (via a “matching portfolio” designed to match the plan’s future liabilities to pensioners) and a separate team focused solely on trying to squeeze additional returns out of those assets. In true arm’s length fashion, the “return portfolio” is required to literally borrow assets from the matching portfolio – creating a real economic incentive to beat the short-term rates charged on this internal loan.
Comments »Weekly Newsreel: Madrid, Stockholm, Maple Syrup and 130/3025 May 2008
Nervous alternatives managers could be leaving alpha on the table: P&I reports from ”AlphaMax” in Madrid that “Fees became a point of contention between pension fund executives and hedge fund managers…with the pension executives arguing that the typical hedge fund management fee of 2% and performance fee of 20% can be a deterrent…” 8 out of 10 managers fail to add value: Meanwhile in Stockholm, Watson Wyatt’s Roger Urwin tells another conference why pensions have an allergy to “2 and 20″.
Comments »New 130/30 and “hedge fund replication” mandates bridge gap between alts and skeptical pensions20 May 2008
One of Sweden’s public pension plans, the EUR9 billion AP7, announced the news at a conference yesterday. Reports IPE.com:
Grottheim told the gathering that he could get “the same returns” by investing directly in the risk factors that tended to drive hedge fund returns. (see previous posting on AP7’s alpha/beta separation programme) But is this really the primary motivation for the move? Since hedge fund of funds returns are reported net of fees, it appears as though AP7 won’t be any better off after the shift. Granted, they won’t have to deal with the discomfort of making any fund of hedge fund managers rich (while they simultaneously aim to fund the retirements of hard working Swedes). But how does this shift really make life easier for the pension plan?
Comments »Chalk another one up for the Transatlantic Trio19 March 2008
On Friday, State Street Global Advisors announced they had landed a US$200 million “hedge fund replication” mandate from the Universities Superannuation Scheme, a British pension plan serving the country’s academic community. This is newsworthy since its one of the first major pensions to pursue such a strategy (although there has been lots of talk). A State Street official sounded a refrain that will be familiar to regular readers of AllAboutAlpha.com:
Comments »Alpha-centric Newsreel14 March 2008
Morgan Stanley says Alpha/Beta Separation “the way of the future”. The AllAboutAlpha site partner lays out its alpha-centric philosophy telling IPE that the pension industry is about to experience a “second wave” of LDI strategies based on the separation of alpha and beta. Dutch Insurer Aegon splits portfolio into alpha and beta segments are farms each one out to a different manager. According to the firm’s press release, “By managing the parts separately from one another, better risk-return ratios are possible. This way, more sources of value added will be available and a greater focus can be created in the portfolio. Separating the US share portfolio has created an increase of a yearly average of the total return of 2.5% without any risk increase.”
Comments »Oh, to be a fly-on-the-wall at the recent HF replication conference.11 March 2008
9:00 AM Monday, March 10: “Got in yesterday despite the bad weather back home and a 300 mph jet stream (which also cramped up my wings a little - had to get a wing massage - but don’t worry, I won’t expense that). Nice Sunday afternoon in London though. Saw a Goose and a Black Swan cavorting yesterday in the park across from Buckingham Palace. Bad omen? Daffodils are blooming here, but storm coming in to London today. Miserable this morning. Hopefully send something more interesting about replication shortly.” 10:23 AM: “Peter Norman from AP7 discussed their separation of alpha and beta (see related posting). They get beta for free given its low-cost. Then they pursue alpha through risk budgeting to managers and not through capital allocations. Long positions are funded by short positions. AP7 covers any temporary losses and allows managers to use their credit. Risk allocation is done using a tracking error methodology carried over from their old long-only active management approach. Going forward, contemplating moving to a VaR approach.”
Comments »Shadwick to Quants: “Financial models should come with health warnings!”9 March 2008Regular readers may remember the name William Shadwick (see related posting). Widely known as the developer of the Omega Function and Omega Metrics®, Shadwick won the 2007 Journalism Award of the Investment Management Consultants Association ,jointly with Ana Cascon, for a paper in which they lifted the veil on some of their powerful new statistics for finance. A prominent mathematician, he was responsible for establishing the Fields Institute for Research in Mathematical Sciences before entering the finance industry in 1998. He is the founder of Omega Analysis, a quantitative research firm in London. Shadwick, who believes in using sophisticated tools and avoiding unnecessary complexity, issues a general warning about the “hidden assumptions” in quantitative models below. He has also been watching the ongoing debate between Harry Kat and Lars Jaeger and tells AllAboutAlpha, “I’m afraid it doesn’t offer much comfort to either the Jaeger or the Kat school…I think that over-modeling has had some severely negative consequences and it’s about time people started to pay more attention to the gap between theory and reality.” That’s all very well in practice, but it will never work in theory!
The title of this piece comes from a joke about a “highly qualified” financial engineer’s reaction to a well-proven trading strategy. It illustrates the tension between theory and practice that we have all seen as quantitative methods become ever more common at trading desks and in investment management. In general, the rise of quantitative tools in finance has been highly beneficial but the widespread use of models has been a decidedly mixed blessing. In science, the constant development of theories expressed as mathematical models to be tested, rejected, confirmed or refined through observation and experiment is the main source of progress in our understanding of the physical world. This process is also crucial for engineering and technology where it is the key to predicting future events and controlling them to our advantage.
Comments »Kat to Jaeger: “Let’s skip the nitpicking…how useful is modern finance theory, really?”5 March 2008One of our primary objectives at AllAboutAlpha.com is to encourage debate and discussion on emerging topics in investment management. That is why we cover new academic studies, surveys, counter-intuitive viewpoints and controversial opinions. Today, we bring you the latest in an ongoing debate between two well-known and highly regarded figures in the hedge fund industry, Professor Harry Kat of the Cass Business School and Dr. Lars Jaeger of fund manager Partners Group (previous postings: Jaeger…Kat…Jaeger…). Although Kat and Jaeger differ on many issues, they share a common interest in furthering the field of finance through frank, collegial and mutually-respectful debate. And judging from our traffic, so do you the reader. Today, Kat responds to Jaeger’s rebuttal… Special to AllAboutAlpha.com by: Professor Harry M. Kat, Cass Business School, London
First, if you want to replicate a diversified hedge fund index, you don’t need alternative betas since such an index is almost fully driven by traditional risk factors. Second, the (traditional) factor exposures of diversified hedge fund indices do not seem to change quickly enough over time to completely invalidate the factor model approach. The performance (backtested or live) of the various factor model based replication products supports this. I showed the evolution of the Goldman Sachs ART index because the Bloomberg data go back until 1996, but I could well have picked another comparable product.
Comments »Jaeger Replies to Kat’s Scepticism on Alternative Beta26 February 2008Lars Jaeger’s recent commentary on “alternative beta” (see posting) raised the ire of Professor Harry Kat (see posting). Today, Dr. Jaeger responds to Kat’s protests by highlighting the “inconsistencies” in his arguments.
In his reply to my recent contribution at AllAboutAlpha.com, Harry Kat says that he agrees with “several points” in my argument (I only made a few key points anyway). Specifically, Kat seemed to agree that factor models capture mostly the “traditional beta” in hedge funds. Further, he seemed to agree with my argument that “hedge fund replication isn’t really about replicating hedge funds. It is about replicating hedge fund indices.” And he goes on to re-state many of my original points. We seem to be in agreement on some very fundamental points. That is good news to me, as Harry has not always agreed with much what I have said in the past. However, he then suggests that there is a need to “fill in the picture” as my comments were only “part of the hedge fund replication story.” I surely never claimed to know the entire hedge fund replication “story”. But what he actually provides us with - in order to “fill in the picture” - is merely a performance comparison between the ART Index (Goldman Sachs’ replication product) and the PG ABS Index (the Partners Group Alternative Beta Strategies). In doing so, Harry is inconsistent in at least three ways. Firstly, he is inconsistent in the way he applies fees in his analysis. While he compares the PG ABS net of fees, he chooses to report the performance of the ART index gross of fees, a rather important difference as hedge fund investors surely understand.
Comments »Kat: HF replication using alternative betas “very useful” but “sounds better on paper than in practice”20 February 2008Not one to shy away from a debate, Professor Harry Kat responds to last week’s column by Dr. Lars Jaeger on “traditional” and “alternative” betas in hedge fund replication. While Kat agrees with several of Jaeger’s arguments, he wonders if the mechanical-trading approach to delivering alternative beta isn’t just “too complex”. Some Comments on Lars Jaeger’s “Hedge Fund Replication and Alternative Beta: Two different ways of looking at replicating hedge funds”
In a note last week on AllAboutAlpha.com, Lars Jaeger discussed the two most common approaches to hedge fund replication: factor models and mechanical trading rules designed to capture “alternative betas”. Although I agree with several of the points that he makes, his comments are only part of the hedge fund replication story. In this brief note, I will attempt to fill in the picture. Most of my comments can also be found in some of my earlier writings on the subject. But it doesn’t hurt to repeat them, however, as we need to be clear on the issue. What is very important when trying to make sense of hedge fund replication products, is to keep an eye on what they actually aim to replicate. Almost without exception they aim to replicate, either explicitly or implicitly, a diversified hedge fund index. So hedge fund replication isn’t really about replicating hedge funds. It is about replicating hedge fund indices. Does that matter? Isn’t a hedge fund index just a portfolio of hedge funds? Yes, it is. But therein lays the problem. When combining hedge funds into a portfolio, many typical hedge fund features diversify away. As a result, diversified hedge fund indices have only a few hedge fund-like properties left and are mainly driven by equity and credit risk. This is easily confirmed by calculating their correlation with the S&P 500 for example. The important conclusion from this is that we do not need alternative betas to replicate a diversified hedge fund index. As Jaeger also suggests, it is primarily driven by traditional betas. With precious little alternative beta actually present in a diversified hedge fund index, the main problem when replicating it is traditional beta.
Comments »AAA Exclusive: Survey contains some surprises about how hedge fund managers now view “hedge fund replication”18 February 2008The results are in from our global online survey on “hedge fund replication” and you may find some of the results a little surprising. The sample of 180 hedge fund managers, investors, consultants and service providers reveals, for example, that hedge fund managers now see so-called hedge fund clones as a complement to their offerings – not a replacement. The survey was conducted jointly by AllAboutAlpha.com and conference producer Terrapinn over the period of January 29-February 6, 2008. What follows is a more in-depth look at the findings. Respondents to this survey represented a cross section of the hedge fund industry from single manager hedge funds to end investors – allowing for some interesting comparisons across segments.
Skeptics of hedge funds often argue that they produce little to no real alpha (see one such example in a recent posting). So to get an idea of the ideological views of the end investors and consultants we first asked them if they attributed hedge fund returns to “manager skill” or to simple risk premia…
Comments »Replicating Hedge Funds: Traditional beta or alternative beta?14 February 2008We are pleased to bring you a guest posting today from Dr. Lars Jaeger of Partners Group. Regular readers and students of hedge fund replication will recall that Dr. Jaeger edited one of the first books covering the topic back in 2003. Since then, he has written a number of papers on hedge fund replication (see related posting) and has spoken at many conferences. He’s also one of the speakers on the programme for Terrapinn’s second Alternative Beta & Hedge Fund Replication conference in London (March 10-12). Hedge Fund Replication and Alternative Beta: Two different ways of looking at replicating hedge funds
Special to AllAboutAlpha.com by: Lars Jaeger, Ph.D., CFA, FRM, Partner, Partners Group The discussion on alpha versus beta in the breakdown of investment returns is as old as the capital asset pricing model which defined these terms some 40 years ago. Today, it has finally reached the hedge fund industry - an area of investing traditionally associated with “pure alpha” or “absolute return”. Investors and researchers alike realize that hedge fund returns are largely composed of betas. However, hedge fund beta is different from traditional beta. While both are the result of exposures to systematic risks in the global capital markets, beta in hedge fund investing can be significantly more complex than traditional beta (and can be often be “hidden in the alpha smokescreen”). We therefore refer to this beta as “alternative beta”, a term that now part of the hedge fund lexicon. In fact, the increased academic and non-academic effort to model and understand hedge fund return sources has also reached Wall Street. The new buzzword: “hedge fund replication”.
Comments »AAA Exclusive: An interview with Prof. Harry Kat about his newest project, “super-diversification”11 February 2008
Well today German-based Aquila Capital, a 1.5 billion Euro manager of alternative investments, did just this. They announced the launch of a market neutral fund that uses Kat’s technique as a risk management overlay. According to the firm’s press release, its Statistical Value Market Neutral (SVMN) fund uses ”a combination of multi-asset investing and a behaviorally driven tactical asset allocation overlay” to actually generate alpha. Then it uses Kat & Palaro’s “FundCreator” software ”to ensure a stable and predictable risk profile over time”. Specifically, this means the fund is designed to have a volatility of 7%, a skew and kurtosis of zero and a correlation to the S&P 500 of zero. In addition, the fund aims to deliver a maximum monthly drawdown of 4%. The zero correlation to the S&P 500 provides what Aquila calls “super-diversification”.
Comments »Hedge Fund Replication: Delicacy or a bunch of baloney?30 January 2008
Click here (or on the button at the right side of your screen) to fill out a quick survey that we are sponsoring with our event partners at Terrapinn. Act now and you’ll be among the first to get the results.
Comments »AAA Exclusive: An Interview with Managers of the World’s Newest Hedge Fund Replication Product17 January 2008
Unlike Desjardins, Innocap is pursuing the more mainstream ”factor replication” approach. But the firm believes its particular take on the process is unique. The fund is based on a mathematical idea called “advanced filtering” borrowed from, among other fields, missile interception. The fund is designed to track the MSCI Hedge Fund Composite Index. A companion fund, “Verso” is designed to have a -1.0 correlation with the same index. The Co-CEO of Innocap, Martin Gagnon, and the firm’s Managing Director of R&D Pierre Laroche spoke with us earlier today about the product, its rationale and its Genesis. Gentlemen, let me start by asking you what you believe is causing all the recent interest in hedge fund replication. Read the rest of this entry »
Comments »“Homemade Hedge Funds”: Delicious but deadly?8 January 2008
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:
Comments »Now “Private Equity Replication”?17 December 2007
Now it seems that the same argument is being used in the private equity industry. In this article Jos van Gisbergen of 58 billion Euro Dutch asset manager Mn Services says that private equity returns can be replicated by a levered investment in public equities. Van Gisbergen cites several studies including one my Citigroup that says the average “top quartile” LBO fund has a 36.6% annualized return over 10 years vs. 38% for ”Pan-European and UK leveraged mid-cap value portfolios” (interestingly, Citigroup included balance sheet leverage, not just fund leverage, their calculation).
Comments »Walking the (Beta) Line4 December 2007
In an October 2007 publication by Northern Trust, the firm says that hedge fund managers “walk the beta line”. In other words, they walk a fine line between making sweet alpha and have a one-night stand with an exotic beta. Says the article:
Comments »Edhec hedge fund replication research now online2 December 2007Regular readers may recall this story we did on a research study by Edhec, the French business school, last spring. The study contained a comprehensive analysis of various so-called hedge fund replication strategies. At the time we directed you to Edhec if you wanted to buy the whole report since it wasn’t available to the public. Well if you’ve been holding out since June, waiting for it to go on sale, this is your day. In the wake of a highly successful conference in London, Edhec has now released both the white paper and a set of accompanying slides used at the event.
Comments »Do individual hedge funds really contain so much beta?22 November 2007One of our all-time favorite alpha-centric companies, Bridgewater Associates, released an interesting edition of its “Daily Observations” Newsletter earlier this week that caught our eye when a loyal reader passed it along to us. First, here’s why we’re fans. Says the latest edition of Daily Observations:
Later in this issue, the firm reiterates its January 2007 observations about alternative beta. While we are fans, we felt that Bridgewater didn’t address a few key issues in its analysis. Knowing first hand, however, how the like to keep to itself, we opted to bite our tongues (Ed: to clarify, each opting to bite their own tongues). But since our friends at HedgeWorld chose to run with the story, we felt that now might be a good time to chime in.
Comments »Alpha, once beatified, now “beta-fied”29 October 2007
Now it appears those concerns were so “last year“. Both Hsieh and Jaeger were among a dozen experts to address a packed audience in New York today at the inaugural US edition of Terrapinn’s “Alternative Beta & Hedge Fund Replication” conference. This time aorund, Alpha Male took a turn at being master of ceremonies. (see related postings on sister events in London and Geneva earlier this year). Instead of worrying about the finite size of the world’s alpha supply, Hsieh, Jaeger et al argued that hedge funds would likely survive on a diet of “alternative beta” even if their traditional food source (alpha-generating market inefficiencies) ran out.
Comments »Siegel: Carefully selecting “exotic betas” a worthwhile pursuit24 October 2007We are pleased to bring you a special guest posting today by one of the big names in institutional money management. But unlike most big names, this one comes from the ranks of investors, not asset managers. Laurence Siegel (see related posting) is the Director of Research at the Ford Foundation. He was co-author of a hugely popular article in the spring 2006 edition of the Financial Analysts Journal called “The Myth of The Absolute Return Investor” that took issue with many of the popular assumptions about absolute return investing. (Siegel’s co-author, BGI’s Barton Waring is featured in a summer 2006 webcast on the topic). In addition, Siegel was also co-author of a great piece called “Five Myths About Fees“, which originally appeared in the Journal of Portfolio Management. Siegel is speaking at a conference next week in New York on the topic of alternative beta and hedge fund replication. In this AllAboutAlpha.com exclusive, he gives us an overview of his thoughts on “exotic beta”. Are Exotic Betas Worth Investing In? A Brief Note.
What are exotic betas? What are clone funds? Has the sober science of money management been taken over by aliens from outer space? No. Let’s start with a brief (but not brief enough) history lesson. Hedge funds evolved out of active management, the attempt to beat a benchmark using security holdings weights that differ from those in the benchmark. Hedge funds differed from traditional actively managed funds in being able to sell short and use leverage; and, typically but not always, in having no fixed mandate (thus no fixed benchmark). Nevertheless active management, including hedge fund management, is always about beating some sort of neutral or normal portfolio that you would hold in the absence of any views. That neutral portfolio is the benchmark; if the fund is perfectly hedged to all systematic market factors, then there is still a benchmark, but it’s cash.
Comments »Paying Tribute to the Clones23 October 2007
- Obi-Wan Kenobi, Star Wars Attack of the Clones, 2002
French business school and research institute Edhec also takes a moment this week to pay tribute to the burgeoning ranks of clones - these ones of the hedge fund variety. In this article, Edhec’s Walter Gehin discusses the key players in the field, but like Obi-Wan, is somewhat obtuse about his personal feelings on the subject. The piece contains a great listing of all the current (major) hedge fund clone offerings (e.g. ART, ABI, ARB, T-Rex, Altera, MAST, ABS - seriously, these are all real names) and divides them into two main categories: factor-based and rules-based. While he seems to agree with the general concept of factor replication, Gehin strikes a note of skepticism:
Comments »New paper claims humans required to manage hedge funds7 October 2007
Now Jonathan Treussard of Boston University claims that while robotic algorithmic trading is a critical element of any hedge fund replication technique, “it may come at a high price in terms of adaptivity, dynamic flexibility and risk selection“. Jut don’t let the robot union find out that human fund managers might be coming back for their jobs! Human capital is, of course, the scarce resource underlying most hedge fund strategies. And exceptions to this rule are generally the ones most scared of the concept of hedge fund replication. Treussard argues that human capital, not investment strategy per se is the reason for “the industry’s remarkably high remuneration structure“. Previous studies such as this one cited by Treussard have also suggested that there is a certain je ne sais quoi in high alpha-producing hedge funds that can be attributed to human ingenuity.
Comments »Alternative Viewpoints: Being like Jesse James30 September 2007This is the first of our series of guest articles (”Alternative Viewpoints - powered by CAIA”) written by a member of the Chartered Alternative Investment Analyst Association (CAIA Association). By: Ryan Teal, CAIA
This is what hedge funds must feel like with hedge fund replication. Until recently investors have been told that hedge fund returns are not properly replicable but what happens if we can not only properly replicate these returns but do so at a significantly lower cost? Recently I was able to view slides from a Thomas Schneeweis presentation called “New Product Development: Replication vs. Indexation”, in which he addresses this concept by discussing new replication methods available (such as Factor-based and Security-based replication), the theoretical basis for each and results from their performance against hedge fund returns. Schneeweis illustrates below that many investors are now finally challenging the notion that hedge funds are not a pure source of alpha but in fact consist of a significant beta, or “alternative beta”, component.
Comments »Kat rebuts itemized list of criticisms over his approach30 September 2007
Both “factor-model” and “distributional” hedge fund replication have attracted a lot of attention over the past year - and both have also been criticized. Kat’s recent presentation in Geneva was aimed squarely at critics of his distributional approach. After presenting his list of 10 criticisms, some in the audience volunteered a few others. Since last week, Kat has been busy incorporating these additional “unjustified criticisms” to the existing list. What resulted was a new paper available here. In descending order, here are Kat’s rebuttals to the top 10 criticisms of his distributional replication approach: 1. “Due to the dynamic nature of FundCreator-based trading strategies, transaction costs will dramatically erode returns.” Summary of Kat’s response: Not true, our model explicitly accounts for transaction costs, futures are highly liquid instruments and trades needn’t be made immediately.
Comments »Hedge fund replicas did their job in August, unfortunately28 September 2007Professor Bill Fung presented some interesting charts in Geneva showing the performance of various hedge fund replication strategies during the tumultuous summer months. Unfortunately, it looks like hedge fund replicators replicated August pretty well. Here is the game tape:
But what’s particularly striking about this performance graph, aside from the drawdown, is the dispersion between replication strategies in August. Looks like they were all performing as planned in June and July - tracking pretty closely to the HFRX Index. Then August hits and wham, they all seem to go their separate ways.
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It used to be that the term “hedge fund clones” referred exclusively to so-called “hedge fund replication” (a.k.a. “alternative beta) strategies. We noted in 
A lot has been written over the past few years about hedge fund/private equity “hybrids” where a so-called “side-pocket” is created to hold a particularly illiquid investment. But while these funds may indeed contain both asset classes, they are long and short in public equities and long-only in private equities. In other words, it is difficult to actually hedge private equity.
As we reported in our weekly newsreel on Monday, Goldman Sachs just launched 
As some pension funds begin to shift from funds of funds to single-manager hedge funds, they usually create what amounts to their own internal fund of funds. The only difference between this fund of funds and a “real” fund of funds is that the pension has only one client: its own pension plan. 
It’s shaping up to be a banner week for alpha-centric investing in Europe. No sooner had the ink dried on one landmark alpha-centric mandate (see 
In the late 1990’s a couple of academics 
Here is a sample of the news stories we didn’t get a chance to explore in detail this week. As usual, all of them can be found on the Alpha-ticker above or in the news items section of AllAboutAlpha.com (free registration may be required for a few of these).
Earlier today, a conference wrapped up in London featuring some of the big names in the hedge fund replication industry (Bill Fung & David Hsieh - see 
Special to AllAboutAlpha.com by: Dr. William Shadwick, Omega Analysis
Before I respond to Lars Jaeger’s comments in more detail, it is probably good to backtrack a bit. In my note of February 20, 2008, I made the following 3 points:
Special to AllAboutAlpha.com by: Lars Jaeger, Ph.D., CFA, FRM, Partner, Partners Group
Special to AllAboutAlpha.com by: Professor Harry Kat, Cass Business School, London
On October 21, we commented that Professor Harry Kat, developer of a “hedge fund replication” technique commonly called “distributional replication”, seemed to downplay his tool’s usage in replicating hedge fund returns and emphasized how it can instead be used as a risk management technique. 
We’ve been writing about hedge fund “replication” 
There’s something in the water in Montreal, Canada. Montreal-based 
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. 
By now, regular readers are familiar with the argument that hedge fund indices can be replicated remarkably well with traditional betas since they are highly diversified. The large and growing number of constituents in these indices means that the idiosyncratic risk that is a hallmark of hedge funds has been diversified away, leaving only a few common factors. Proponents of hedge funds are quick to point out that this statistical axiom isn’t an indictment of hedge funds as much as it is an argument against excessive diversification. Single-manager funds, they say, are much more difficult to replicate using traditional betas (let alone “exotic betas”). With the hedge fund industry so large, expecting the sum total of all the world’s hedge funds to produce excess returns is like expecting the sum total of all mutual funds to beat the market.
In August 1956, Johnny Cash released a song that later became the title to a movie about the troubadour called Walk the Line. In the song I Walk the Line, Cash promises his wife, Vivian, that he will remain faithful to her even with the temptations that come with touring.
It was only a couple of years ago that David Hsieh made an off-the-cuff remark that many took as a questioning of the long-term viability of the hedge fund industry (
By Laurence Siegel, Special to AllAboutAlpha.com
Star Wars fans may remember Obi-Wan Kenobi’s famous words after cleaning up by shorting Death Star sub-prime debt in a galaxy far far away then hedging it with a Sith-Jedi total return swap. But was Kenobi serious, or was he just being flippant? Was he really impressed with the clones? 
With all the talk of automated hedge fund replication and hedge fund “cloning” these days, it’s easy to discount the role of that apparently antiquated technology, the human being, in hedge fund management.
I was watching TV the other day and an advertisement came on for the movie, “The Assassination of Jesse James by the Coward Robert Ford”. The Jesse James character muses to a young, infatuated Robert Ford, “Do you want to be like me, or do you want to be me?”
At a conference last week, Professor Harry Kat of hedge fund replication fame presented a list of his specific rebuttals to 10 criticisms. He’s since included the audience’s feedback in a new article on distributional replication released this weekend. 