•  
• Tweet
•  
•        Print
•  
•         Track Keywords
•  
• 

Harry Kat calls his model `hedge fund inspired`, `hedge fund resembling funds` rather than replication

Since the launch of FundCreator we have received various emails from people who, put simply, stated that “You guys are mad, there is no way you can replicate the best hedge funds”. Comments like these betray a serious misconception of what synthetic funds are really about. In this brief note I will attempt to correct this.

First of all, it should be noted that, despite their popularity with the media and conference organizers, the use of terms like “replication” and “clones” is somewhat unfortunate as such terminology creates expectations, which neither FundCreator nor factor model based funds live up to. FundCreator aims to provide returns with predefined statistical properties. Nothing more, nothing less. When the desired properties are derived from an existing fund.s or index.s track record we refer to this as “replication”. We do not, however, attempt to generate the same month-to-month returns, just returns with the same statistical properties as a given fund or index.

Factor models do try to generate identical month-to-month returns and as such the goal is indeed true replication or cloning. However, except for some extremely well diversified indices, the accuracy of factor model based strategies tends to be low, which means that in practice these strategies are not true replication strategies either. In sum, FundCreator and factor model ba......................

To view our full article Click here