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Abstract
Replication products strive to offer investors some of the benefits of hedge funds while avoiding their high fees, illiquidity, and opacity. The authors of this article test whether a replication algorithm can deliver the diversification and high Sharpe ratio that investors seek. Their procedure constructs monthly clone returns out-of-sample using fully collateralized futures positions held for one-month, with position sizes determined using rolling window regressions. Clone returns have high correlation with their hedge fund targets, indicating replication is possible. Clones also have high correlation with a buy-and-hold investment in stocks, however, and neither the targets nor their clones demonstrate successful time variation in factor loadings.
TOPICS: Real assets/alternative investments/private equity, futures and forward contracts, statistical methods, performance measurement
- © 2013 Pageant Media Ltd
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