Hedge Fund Replication
A Short Run Down on Hedge Fund Replication
When potential buyers consider the costs and benefits of hedge funds, the most striking attributes are high returns, hedging against losses and the 2 & 20 rule (funds charge around 2 percent in fees and 20 percent on performance). Is there away to achieve the returns of hedge funds, and get around the fees and high capital requirements? Yes. Synthetic hedge funds (or clones) invest in the same stocks as certain hedge funds. But they're not private hedge funds funds, so they're cheaper, more liquid and more transparent.
Those using hedge fund replication can also avoid the monitoring and due diligence costs brought on by the legal requirements surrounding hedge funds. The blog "Abnormal Returns" says "the growing number of hybrid funds, that use hedge-fund like strategies within the confines of open-end mutual funds, show that there is both demand for, and an ability to bring these strategies to individual investors." Both Merill and Goldman Sachs have introduced hedge fund replication strategies. Since these funds are primarily directed by computers, they have cost less than 1 percent for investors. And they can be tweaked to outperform those funds they were originally intended to imitate.
Will these types of hedge funds stick around? Most hedge fund industry professionals are doubtful. They often adjust slowly to market changes while hedge funds are known for their nimble entry and exits into specific sectors or securities. Only time will tell.