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Passive Hedge Fund Replication

A Critical Assessment of Existing Techniques

Noël Amenc, Walter Géhin, Lionel Martellini and Jean-Christophe Meyfredi
The Journal of Alternative Investments Fall 2008, 11 (2) 69-83; DOI: https://doi.org/10.3905/jai.2008.712598
Noël Amenc
A professor of finance at Edhec Graduate School of Business in Nice, France.
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  • For correspondence: noel.amenc@edhec-risk.com
Walter Géhin
A business analyst/research associate at Atos Worldline Financial Market/Edhec Risk and Asset Management Research Center in Nice, France.
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  • For correspondence: walter.gehin@edhec-risk.com
Lionel Martellini
A professor of finance at Edhec Graduate School of Business in Nice, France.
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  • For correspondence: lionel.martellini@edhec.edu
Jean-Christophe Meyfredi
A professor of finance at Edhec Graduate School of Business in Lille, France.
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  • For correspondence: jcm@edhec.edu
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Abstract

In this article the authors provide a critical analysis of various methodologies involved in “passive replication” of hedge fund returns, a subject that has received renewed interest following recent initiatives by major investment banks. The authors examine from both theoretical and empirical perspectives the benefits and limits of the two different and somewhat competing approaches to hedge fund replication, respectively known as “factor-based replication,” and “payoff distribution replication.” The analysis suggests that only through the introduction of novel econometric techniques allowing for a parsimonious statistical estimation of the dynamic and/or non-linear functions relating underlying factors to hedge fund returns can hedge fund replication be transformed from an attractive concept into a workable investment solution. The authors conclude that hedge fund replication is still very much a work in progress.

TOPICS: Real assets/alternative investments/private equity, passive strategies, factor-based models, performance measurement

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The Journal of Alternative Investments
Vol. 11, Issue 2
Fall 2008
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Passive Hedge Fund Replication
Noël Amenc, Walter Géhin, Lionel Martellini, Jean-Christophe Meyfredi
The Journal of Alternative Investments Sep 2008, 11 (2) 69-83; DOI: 10.3905/jai.2008.712598

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Passive Hedge Fund Replication
Noël Amenc, Walter Géhin, Lionel Martellini, Jean-Christophe Meyfredi
The Journal of Alternative Investments Sep 2008, 11 (2) 69-83; DOI: 10.3905/jai.2008.712598
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