Performance Characteristics of Hedge Fund Replication Programs

Hedge Fund replication has generated significant academic and practitioner interest in recent years. This interest has been translated into several product offerings by the major investment banks such as Goldman Sachs, Morgan Stanley and J.P Morgan. Replication products generally follow three approaches: security-based replication, factor-based replication and distribution-based replication.This article examines the performance characteristics of various hedge fund replication programs. The results show that the performance of the replication products can vary significantly. The volatilities of the replication programs, as is the case with individual fund volatilities, vary widely as well. The authors conclude that a more robust dataset is necessary to rigorously analyze the performance of these programs.