Abstract

http://ssrn.com/abstract=1014861
 
 

References (12)



 


 



Automatic for the People? Hedge Funds, Traditional and Clones


Jonathan Treussard


Ziff Brothers Investments - Risk Management

October 4, 2007


Abstract:     
While some herald the development of hedge fund replicators as marking the industry's own ETF revolution, others are expressing concern over the clones' properties since traditional hedge funds are human-capital intensive financial operations and the high concentration of specialized talent is the reason for the industry's remarkably high remuneration structure. Taking much of the human capital out of hedge fund strategies is a pre-requisite for bringing the costs of replicators down, but it is one that many feel comes at a high price in terms of adaptivity, dynamic flexibility, and risk selection. In this article, I study a continuous-time model of arbitrage selection, which sheds light on this trade-off and provides added perspective on the issue. Several important results are obtained. First, a hedge fund's optimal trade selection criterion depends on a risk-reward trade-off that balances the expected gains from the trade and the uncertainty surrounding the trade's speed of convergence. Furthermore, the ability to select potential arbitrage trades generates a value for the fund's net discounted cash flows that resembles prototypical option-pricing formulas. In addition, the value added of human capital to a hedge fund's operations is dramatically enhanced when the fund deals in potential arbitrage trades for which there is a significant amount of uncertainty regarding the speed of convergence or the chances of divergence. Additional observations are made.

Number of Pages in PDF File: 21

Keywords: Hedge Funds, Synthetic Hedge Funds, Hedge Fund Replication, Hedge Fund Clones, Human Capital, Arbitrage Trading

JEL Classification: D81, D83, D84, G23, G24

working papers series


Download This Paper

Date posted: September 17, 2007 ; Last revised: October 3, 2011

Suggested Citation

Treussard, Jonathan, Automatic for the People? Hedge Funds, Traditional and Clones (October 4, 2007). Available at SSRN: http://ssrn.com/abstract=1014861 or http://dx.doi.org/10.2139/ssrn.1014861

Contact Information

Jonathan Treussard (Contact Author)
Ziff Brothers Investments - Risk Management ( email )
New York, NY
United States
Feedback to SSRN


Paper statistics
Abstract Views: 1,379
Downloads: 324
Download Rank: 33,350
References:  12

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.235 seconds