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Alternative Market Briefing

Consultants argue that hedge fund replicators lag indexes, hedge funds in performance

Thursday, June 27, 2013

Bailey McCann, Opalesque New York: A new report from investment consultants Hewitt Ennis Knupp shows that hedge fund replicators, which are growing in popularity with some investors still lag the real thing in terms of performance. Some liquid alternatives on the market today, seek to replicate the returns of true absolute return funds but with liquid approaches that fit into mutual fund requirements. However, reliance on indexes, and a high correlation to the equities markets can cause these products to underperform compared to the indexes they track or actual hedge funds.

According to the firm, hedge fund replicators focus on trying to recreate certain factors of hedge fund performance, removing the focus from capturing alpha and managerial skill. The report notes that the most common replication process is to try to capture the broad moves of the "hedge fund universe" through indexes. They say that over time, you may be able to capture much of the same returns as the index, but because the replicator is looking at a universe of funds instead of a given fund or strategy, it won't be nimble enough to react in the same way a hedge fund manager would to shifts in the market.

"The replication strategy is always playing catch up, as it is based on historical data. It can also be relatively sluggish, as most products are only rebalanced monthly. Hence strategies with a high turnover, and mid-month inflection points in markets will be very difficult to replicate," au......................

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