Bloomberg – Feb. 22 (Bloomberg) — Five minutes ago, advisers barnacled to the investment industry were championing hedge funds as balm for the swollen deficits afflicting pension funds.
Now, the purveyors of contradictory counsel have decided hedge-fund investments are more placebo than panacea.
At a two-day conference in London last week, the backlash was in full swing as more than 200 attendees pondered the merits of “Hedge Fund Replication and Alternative Beta.” While the two-part title won’t win any awards from the Plain English Campaign, it sketches a possible solution to the current disenchantment with the former market paragons.
The concept is seductively simple. Is it possible to reproduce a hedge fund on the cheap, duplicating the strategies and stellar returns without giving away fees worth 2 percent of the initial investment and 20 percent of the profit?
The easiest way to try and get your head around the cloning concept is to consider how a merger-arbitrage fund operates. Its investment style is easy to understand: Buy the stocks of companies being bought, which typically gain, and sell short the stocks of acquirers, which typically decline.
A rule-based system would copy that strategy and “capture almost all of the return,” Bill Fung, a professor at the BNP Paribas Hedge Fund Centre of the London Business School, said at the conference.
