35 Pages Posted: 10 Jul 2012 Last revised: 22 Mar 2013
Date Written: July 3, 2012
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: 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
By Andrew Ang