Is Fund Cloning the Future?
Hi guys!
Did a quick read on this article. The author seems to tout on how much better (or cheaper) cloned funds are compared to hedge funds themselves.
The point here is that most of a hedge fund’s performance can be cloned effectively and in a low cost vehicle. Investors would generally be much better off giving up 48 basis points of pre-expense annual alpha vs. a clone in exchange for paying ETF level fees rather than 2 and 20.
Are cloned funds the future? Of course, without any hedge funds there would be no funds to clone but as we move forward, will smaller hedge funds find it harder to survive with investors flocking to cloned funds?
What do you guys think?
It's actually quite challenging to 'clone' a fund. My understanding is that you have the ability to 'clone' by either a) trying to replicate the exposures/factors of an underlying index or sub index. (HFRI & HFRI sub-indices) by using a fitting regression and you can tweak the weightings to get the best fit. or b) Replicating the strategies for security selection etc.
I think both have pro's and con's and honestly I prefer the former - but the issue is that the alpha dispersion on PE/HF managers can be huge and you are at best replicating the weighted mean exposures. ( have seen 1200 bps quoted for PE managers in 1st quartile vs. 3rd quartile).
That's my two cents.
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