The Pros and Cons of Passive Hedge Fund Replication

A number of major investment banks and asset management consultants have recently launched investment products that promise to replicate hedge fund returns by following rule-based strategies that invest in liquid financial products.

Author(s):

Noel Amenc

, Professor of Finance and Director of Research and Developmentat EDHEC Business School.

David Schroder

Management Research Centre.

The argument is that such products provide hedge fundlike returns while making it possible to avoid paying the high fees charged by hedge funds. In a recent publication, the EDHEC Risk and Asset Management Research Centre analyses the replicating performance of the two main approaches to hedge fund replication (Amenc et al. 2007). It concludes that, although hedge fund replication is theoretically appealing, it does not, in practice, deliver satisfactory results. Following the study, EDHEC called for practitioner views on replication products. We find that very few of the asset managers who respond to our survey have invested in such products. Many investors are critical of passive hedge fund replication and have doubts about its potential benefits.

Type: EDHEC Publication
Date: le 06/10/2008
Research Cluster : Finance

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