Send in the Clones? Hedge Fund Replication Using Futures Contracts

35 Pages Posted: 10 Jul 2012 Last revised: 22 Mar 2013

Nicolas P. B. Bollen

Vanderbilt University - Finance

Gregg S. Fisher

Gerstein Fisher

Date Written: July 3, 2012

Abstract

Replication products strive to offer investors some of the benefits of hedge funds while avoiding their high fees, illiquidity, and opacity. We test whether a replication algorithm can deliver the diversification and high Sharpe ratio that investors seek. Our 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.

Keywords: Hedge fund, replication, market timing

JEL Classification: G23

Suggested Citation

Bollen, Nicolas P. B. and Fisher, Gregg S., Send in the Clones? Hedge Fund Replication Using Futures Contracts (July 3, 2012). Vanderbilt Owen Graduate School of Management Research Paper No. 2102593. Available at SSRN: https://ssrn.com/abstract=2102593 or http://dx.doi.org/10.2139/ssrn.2102593

Nicolas P.B. Bollen (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

HOME PAGE: http://mba.vanderbilt.edu/faculty/nbollen.cfm

Gregg S. Fisher

Gerstein Fisher ( email )

565 Fifth Avenue
27th Floor
New York, NY 10017
United States
212-968-0707 (Phone)

HOME PAGE: http://www.gersteinfisher.com

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