Newly-released government UFO files aren’t the only controversies pitting skeptics against “believers” these days…
Hedge fund replication is back in the news today with the publication of the results from a survey on the topic conducted last winter by French research institute Edhec Risk and Asset Management Research Centre. While the results are somewhat dated, they are a good recap of the concept as a lead-up to Edhec’s annual alternative investment conference in London in a couple of weeks (Edhec’s “Alternative Investment Days“). The bottom line: polarization between those who believe there may be some value in the exercise and those who ridicule it as a hoax.
Regular readers may recall our own poll on this topic (conducted in partnership with conference producer Terrapinn) conducted around the same time (winter 2008). We were curious to see if our findings lined up with those of Edhec and were encouraged to see that both surveys seemed to have yielded roughly the same results – with a few notable exceptions. Edhec’s sample was about the same size as ours with slightly more asset managers and fewer end investors. While we did not ask about geography, Edhec notes that its sample was predominantly European. As we wrote in the commentary for our recent 130/30 survey, respondents to surveys like this are likely to be skewed toward those with an existing interest in the topic. As a result, caution should be used in extrapolating the results (of both surveys).
First, on the critical question of adoption, both surveys put the proportion who invest in these products at around 20%. Seven percent of investors told AAA they had invested in these products and a further 21% said they planned to do so in 2008. Edhec found that 15% of all respondents had already invested while a further 4% said they would “soon” do so. (Click all charts to enlarge. Our survey-left; Edhec’s-right)
Why the interest? Both surveys found that liquidity and lower fees were the primary drivers of adoption. Interestingly, however, we found a difference between the views of end investors and asset managers. While investors were most enthusiastic about the greater liquidity offered by hedge fund replication products (vs. hedge funds themselves), asset managers were split between liquidity and fees. (Edhec did not break down the results of their survey between managers and investors).
Edhec also found that transparency and “control of operational risk” weren’t far behind on the list of potential benefits. But for our respondants, these ranked way behind both liquidity and fees.
Finally, both surveys asked those who had not invested in hedge fund replication products why that was. Generally speaking, both polls found a lack of knowledge and a fundamental skepticism to lie at the root of this resistance. Oddly, no one told AAA that performance per se was a problem – although a “lack of track record” was identified by many as an issue. On the other hand, “poor performance” ranked #1 in Edhec’s list of most common reasons for push-back.
In their recent report on the results, Edhec identifies the love/hate relationship that investors and managers have with hedge fund replication. They report that respondents’ comments ranged from admiration to flat-out ridicule for the concept. We found largely the same polarization in our results too.
The Edhec report includes a lot more discussion on this topic and worth a read if you want to keep an eye on this topic, but just don’t have the time to immerse yourself in the search for extra-terrestrial alpha.