Replicating Hedge Fund Performance By Way Of Trading Futures Contracts

The hedge fund universe is now getting so crowded that there is just not enough good performance to go around. With relatively low barriers to enter into the hedge fund industry, just how much “alpha” is out there, on average, considering the large number of participants? And will the trend of more assets going into a larger number of hedge funds continue?

City University London's Professor of Risk Management and Director of the Alternative Investment Research Centre at the Cass Business School Harry Kat, as well as those from other famous researchers [Lo, Jaeger, etc.], provide various statistics as part of the argument to validate their work. In the case of Kat and his associate, Helder Palaro, they have developed solutions which, according to the recent articles, is now being used by a small number of institutional investors. It is with this program that investors have the means to build portfolios based on Kat’s research.

According to Kat: “In most cases, managers aren't good enough to make up for the massive fees that they charge. The combination of excessive fees and minimal opportunity in the market makes alternative investments really doubtful in terms of their value for portfolios.”

Essentially, through broad beta exposures chosen from a list of 78 different futures contracts managed on a highly active basis, the program makes any number of allocation decisions so as to achieve the desired amount of statistical characteristics [correlation, volatility, etc.].