Send in the Clones? Hedge Fund Replication Using Futures Contracts
In this paper Nicolas P.B.Bollen and Gregg S. Fisher explore how replication products strive to offer investors some of the benefits of hedge funds while avoiding their high fees, illiquidity, and opacity. They 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’.
Published in the Journal of Alternative Investments, Fall 2013.