Who needs Hedge Funds?

[HelderUK]

For those interested in academic papers....

In this paper we develop and demonstrate the workings of a copula-based technique that allows the derivation of dynamic trading strategies, which generate returns with statistical properties similar to hedge funds. We show that this technique is not only capable of replicating fund of funds returns, but is equally well suited for the replication of individual hedge fund returns. Since replication is accomplished by trading futures on traditional assets only, it avoids the usual drawbacks surrounding hedge fund investments, including the need for extensive due diligence, liquidity, capacity, transparency and style drift problems, as well as excessive management fees. As such, our synthetic hedge fund returns are clearly to be preferred over real hedge fund returns.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=855424

 

[TWI]

Thanks. I do not see it as a threat to Hedge Fund investment however because if you have got to fully understand and believe this paper then there may be issues.

 

[jmreeve]

1) This is an excercise in data fitting. Whilst you may replicate the past performance there is no reason to expect you will replicate future performance. Crude out-of-sample testing is not sufficient to establish this.

2) To trade the strategy effectively you will need to attract sufficient capital to trade through a prime broker.
This will mean attracting investors at which point you will become a hedge fund anyway. If you are a hedge fund then a strategy to replicate another funds performance is not much use.

Like most of the output from academia, long on theory but short on any real practical application.