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A Factor-Based Application to Hedge Fund Replication

In: Hedge Fund Replication

Author

Listed:
  • Marco Rossi
  • Sergio L. Rodríguez

Abstract

Hedge fund returns are generally considered to be little correlated with market returns. Skills and dynamic strategies are claimed to generate more complex risk exposures that yield superior performance (alpha) or complementary sources of risk premium (alternative beta) through bear and bull markets by using a broad range of instruments, such as derivatives, leverage, short selling, and arbitrage across markets. This market neutrality feature of hedge funds would suggest that investing in hedge funds, either directly or through funds of hedge funds, could be an effective tool of portfolio diversification, hence making it appealing for a large range of institutional investors and high-wealth individuals.1 However, hedge funds (1) provide limited liquidity, as resources are usually “locked up” for 1–3 years; (2) impose high management fees (up to 5 percent a year); and (3) offer poor transparency.

Suggested Citation

  • Marco Rossi & Sergio L. Rodríguez, 2012. "A Factor-Based Application to Hedge Fund Replication," Palgrave Macmillan Books, in: Greg N. Gregoriou & Maher Kooli (ed.), Hedge Fund Replication, chapter 12, pages 159-190, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-35831-7_12
    DOI: 10.1057/9780230358317_12
    as

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