Hedge Fund Replication: A Model Combination Approach


Speaker


Abstract

Recent years have seen increased demand from institutional investors for passive replication products that track the performance of hedge fund strategies. We find that, in practice, linear replication methods routinely suffer from poor tracking performance and high turnover. To address these concerns, we propose a model combination ap- proach to index replication that pools information from a diverse set of pre-specified factor models. Compared to existing approaches, the pooled clone strategies yield con- sistently lower tracking errors, generate less severe portfolio drawdowns, and require substantially smaller trading volume. The pooled hedge fund clones also provide eco- nomic benefits in a portfolio allocation context.