An investigation of 21 replication products offered by 17 asset managers, shows their risk-adjusted returns fared significantly better when compared to the HFRI Fund of Fund Composite during the financial crisis. The replication products consist of funds and tradable indexes which use three approaches: factor analysis, reverse engineering and dynamic hedging. The best results were achieved by funds using a dynamic trading approach, notes Erik Wallerstein, research fellow at Haute Ecole de Géstion in Switzerland. Prof. Nils Tuchschmid and Dr. Sassan Zaker, senior portfolio manager at Julius Baer Asset Management, are co-authors of the working paper. The study analysed the performance of 21 replication funds and indexes between April 2008 and May 2009.

The top performing dynamic funds are AC-Statistical Value Market with a compounded return of 3.6% and DGAM-Synthetic Alternative with a loss of 2.5%. Short-replication indexes also performed well. Return distributions varied widely between the replication funds and indexes, varying from -27% to 3.6%. Annualised standard deviation, or risk, varied from 5% to 22.9%. One of the worst performers was Deutsche Bank’s Absolute Return Beta index, posting a loss of 22%. This compares to a loss of 14.8% for the HFRI Fund of Funds Composite.

Of the replication funds and indexes analysed, 13 are based on factor analysis, 4 are rule based and 2 use a dynamic trading approach. Two use a combination of factor analysis and rule based techniques. “Dynamic trading remains opaque,” notes Wallerstein. “It is hard to understand when or under which market conditions these products earn high returns. When interpreting our results, one should bear in mind that the analysis covers a recessionary period. We do not know how well these replication products would perform in a bull market. This remains to be seen.” The 21 replication products used in the analysis represent most of the replication universe. There are 31 such products, estimates Wallerstein, with $2bn in assets.

Return distributions of the products are heterogeneous, varying from -27% to 3.6%. Annualised standard deviation, or risk, varies from 5% to 22.9%. Overall, hedge fund replication seems to deliver competitive performance relative to hedge funds at a far lower fee level and a high level of liquidity, the authors conclude. However, they all fall short of delivering absolute returns. “There are some worrying examples of failures among the products we investigate,” notes the report. “These exhibit very high correlation to market indices and seem incapable of capturing attractive risk-return structures of hedge funds. This calls for caution from investors to thoroughly evaluate the models of replication products.” Investors should also question the promise of improved transparency as the trend is for replication models to become increasingly complex, raising the importance of understanding why models allocate to certain assets.

Diese E-Mail-Adresse ist gegen Spam Bots geschützt, Sie müssen JavaScript aktivieren, damit Sie es sehen können