Hedge Funds : No Future
Theory : Hedge Fund Returns: You Can Make Them Yourself! by Harry Kat :
By dynamically trading futures in very much the same way as investment banks hedge their OTC option positions it is possible to generate returns that are statistically very similar to the returns generated by hedge funds but without any of the usual drawbacks surrounding alternative investments, i.e. without liquidity, capacity, transparency or style drift problems and without paying over-the-top management fees. Hedge fund returns may be different, but they are certainly not unique.
Practice:
The FundCreator risk control system allows investors to design futures trading strategies (which for simplicity we refer to as ‘synthetic funds’), which generate returns with pre-defined statistical properties, i.e. returns with a pre-defined volatility, correlation with stocks and bonds, etc. Although based on state-of-the-art econometrics, FundCreator is extremely easy to use and does not require any technical background. Once the desired return distribution is selected, FundCreator simply tells the investor every day how many futures contracts to buy or sell. Following these recommendations will generate returns with the desired properties.
Apart from replicating existing funds, FundCreator can be used to create completely new risk-return profiles, which are not available elsewhere in the market. This means that investors no longer have to rely on a limited supply of funds or make a guess at a fund’s true risk-return profile. Using FundCreator, they can structure tailor-made synthetic funds, which produce returns with exactly the properties they are looking for. Put simply, FundCreator allows investors to create their ideal diversifier.
+ Send in the clones The Economist
+ Tell Me What You Want, What You Really, Really Want! An Exercise in Tailor-Made Synthetic Fund Creation Harry Kat - Helder Palaro
+ Can Hedge-Fund Returns Be Replicated?: The Linear Case Hasanhodzic -Lo
Update : 4/12/2006 on the Goldman Sachs cloning effort, a.k.a Absolute Return Tracker [ART]
+ Goldman Sachs Group Inc sets up hedge fund clone FT
+ Goldman Sachs Group Inc launches hedge fund clone FTfm
+ Hedge Funds: Attack of the Clones BW
+ Goldman Sachs’ Hedge Fund Clone The Econophysics Blog
+ Large number of papers on synthetic funds