Francois-Serge L’habitant is one of the big names in the hedge fund research field. He literally wrote the book – or at least a book – on hedge funds. His latest book “Handbook of Hedge Funds” was released in February and Edhec Business School just published this brief interview in which L’habitant discusses hedge fund replication.
Based on what L’habitant has to say about hedge funds, “Handbook of Hedge Funds” must be a pretty short book. He tells Edhec that the majority of hedge funds can be easily replicated using passive factors and that, as a result, he is “not that interested in them”. (We are left to assume the book is about the small minority of funds in which L’habitant is interested).
“…my view is that if a fund is replicable ex-ante month after month by a simple ‘automated’ strategy, then I am not interested in this fund â€“ its manager is essentially selling beta at the price of alpha. Note that this is probably the case of the majority of hedge funds and hedge fund indices today, so why not replicate them”
While advocating replication where it’s possible, he doesn’t seem particularly enamored by factor replication. However, L’habitant is decidedly more bullish on the dynamic trading approach to replication advocated by Prof. Harry Kat:
“I find the approach suggested by Harry Kat (FundCreator) is more interesting. First, it is more general, as it aims to provide returns with predefined statistical properties and hedge fund replication is only one of its possible applications. Second, it does not attempt to generate the same month-to-month returns, just returns with the same statistical properties as a given fund or index. As a result, it is not really the kind of ‘replication’ that investors are familiar with.”