Replicas: Have Hedge Funds Re-Resurrected as Traditional Beta?

Abstract

With continued strong inflows into hedge fund strategies, it is imperative for researchers to study if hedge funds are still worth their high fees. In an updated and comprehensive study covering both North American and Asian hedge funds, we find market risk factors explain up to 81% of hedge fund portfolios’ variance, while out-of-sample clones have up to 98% correlation with realized returns. So-called “market neutral” funds take on significant short-term market bets, where rolling beta clones display up to 74% correlation with realized returns. Overall, returns attributable to skill have declined systematically, with clones outperforming hedge fund indices.

Keywords: Hedge Fund Risk Exposures, Hedge Fund Clones, Market Risk Factors, Alpha, Beta, Alternative Beta

JEL Classification: G11, G12, G14, G19