Hedge Fund Clones

Hedge Fund Clones are a relatively new type of invesmtent product that is being offered on wall street. These funds try to clone or replicated the investment strategies of hedge funds in hopes of reaping some outsized returns with minimized fees and lock-up periods for end-clients. While this strategy hasn't been around long enough to have much of a track record interest in the product is growing quickly. The typical fee for hedge fund clones currently being offered are around 1% which is much lower than the flat 2 and 20% fees of hedge funds. (2% flat fee + 20% performance fee).

FIrms launching hedge fund clones include Goldman Sachs, Merill Lynch, Morgan Chase, State Street Global, and Deutsche Bank. Most hedge fund clones offered by these firms can be purchased and sold ona daily or weekly basis.

Most of these hedge fund clones are structured as premium indexes. This is why many researchers on the academic and professional side of the investment industry have doubts about the returns that hedge fund clones will produce. Hedge fund clones indexes may be superior to several other indexes in terms of total return but nobody could expect an index to keep up with the returns of the top 20% of hedge funds which is partially what motivates high net worth investments to invest in hedge funds in the first place.

Most hedge fund clones are created using the "factor model approach." This approach creates the hedge fund clones by looking at the performance over the last set period of time such as one year and then figuring out what securities you would have had to hold to achieve those returns. This is an important point to understand as this approach has been critized as simply creating a similiar risk/reward portfolio to hedge funds without any of the diversified asset as nimbly adjusted portfolios of true hedge funds. While most of these hedge fund clone models are updated each month I would venture to say this will speed up to once a week or even more frequently in the near future as the products become more competitive.

- Richard

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