RT Journal Article
SR Electronic
T1 Evaluating the Efficiency of Hedge Fund Replication:<br/>
               <em>Return and Diversification Effects</em>
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 79
OP 92
DO 10.3905/jai.2016.19.1.079
VO 19
IS 1
A1 Dmitri Blumin
A1 Roie Hauser
A1 Azriel Levy
A1 Kartikeya Rao
YR 2016
UL https://pm-research.com/content/19/1/79.abstract
AB This article analyzes the benefits of adding hedge fund replication products (clones) to an existing portfolio in comparison to adding actual hedge funds as represented by hedge fund indexes. The authors employ the marginal Sharpe methodology to evaluate the benefit of adding an investment to an existing long-only portfolio. The marginal Sharpe is decomposed into a return component and a diversification component, and the authors conduct separate tests on the two components and compare clones with hedge fund indexes. Hedge fund clones, which are liquid trading strategies, seem to be able to replicate the benefit stemming from the diversification component. With respect to the return component, the benefits of adding a hedge fund index to an existing portfolio are significantly higher than those obtained by the clones. However, these results are mitigated after accounting for fees and hedge fund premiums.TOPICS: Real assets/alternative investments/private equity, portfolio construction, mutual funds/passive investing/indexing, performance measurement