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Bailey McCann, Opalesque New York: Gregg S. Fisher, President & Chief Investment Officer of independent investment management firm Gerstein Fisher, and Nicolas P.B. Bollen, the E. Bronson Ingram Professor of Finance at the Owen Graduate School of Management, Vanderbilt University, have released a study, "Send in the Clones? Hedge Fund Replication Using Futures Contracts", that examines the performance of replication algorithms used to build hedge fund "clones". Replication products are becoming more popular with investors seeking lower fees, more transparency and greater liquidity than they can typically expect from a hedge fund.

In their study, Mr. Fisher and Dr. Bollen sought to replicate a series of Dow Jones Credit Suisse hedge fund indexes using five liquid futures contracts to permit low-cost, liquid exposure to most major asset classes. They then performed a series of rolling-window regressions, each of which yielded a set of allocation weights that were used to construct a clone portfolio.

According to data presented in the paper, clones show a high correlation to their underlying indices however, the Sharpe ratio performance of the clone is notably inferior to that of a hedge fund. "The only way clones can add value is by capturing the factor timing activity of the hedge funds they are attempting ......................

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