FT Alphaville- The world of hedge fund replication has in the past left us a little flummoxed. But having ploughed through the seventh instalment of Harry Potter on the day of its release,we’re pretty darn confident we can take on all comers when it comes to analysing the adventures of the boy wizard.
So there was much delight when we happened across a blog posting combining just these two topics. Clarity would be ours at last, surely?
Guest blogger Tammer Kamel from Iluka Hedge Fund Consulting, at All About Alpha, writes that if hedge funds are market wizards, then the clones are muggles looking for Hogwarts. Thus far they don’t seem to have found the school – nor have they discovered the chamber of alpha. But, he adds, their efforts are nonetheless valuable to investors. Kamel says:
Hedge fund replication is not wizardry at all of course, it is an elegant application of quantitative finance which I find intriguing, albeit for the wrong reasons.
The right reasons would be a hedge fund product at a lower cost, with more transparency, scalabilty and so on – which is all desirable provided the clone meets the requisite level of expected returns. Alas not, says Kamel.
The cloning techniques I have thus far encountered aim to emulate what hedge funds actually do as opposed to what they are supposed to do. This is a consequence of taking the performance of the hedge fund collective as their replication objective. But the performance of the collective, or equivalently the average hedge fund, is actually not good. Thus replicating the average hedge fund is no use to me since the average hedge fund is a bad investment.
