Hedge Fund Replication Generating Some Interest

A recent Financial Times article highlights that 15 percent of asset management houses, pension funds, and private banks have invested in hedge fund replication strategies (the survey had only 97 respondents). Given the low number of companies offering products, the interest and use indicates that some firms are engaged in internal model development. As further encouragement for the field, 55 percent say they would be willing to consider investing in replication strategies, while only 30 percent were against such investment (of course, that could change as the strategies become more developed). On the down side, a significant minority of respondents also felt that hedge fund returns could not be replicated, were not transparent enough, used unproved technology, or simply gave poor returns. Many appear to be waiting for better products, even though there is a significant fee reduction when using replication strategies. Considering that the hedge fund industry is currently unpopular and an easy punching bag, not to mention being down for the year, the results are encouraging for those doing replication research and indicate some interest for the development of more robust models going forward.