Alternative Beta Strategies and Hedge Fund Replication

Preface

The increased academic and nonacademic effort in modeling and understanding hedge fund return sources has finally reached Wall Street. A new buzzword is out and has quickly captured the imagination of product providers and investors alike: ‘hedge fund replication’. In the broadest sense, replicating hedge fund strategies means replicating their return sources and corresponding risk exposures. However, there is still no coherent picture of what hedge fund replication means in practice, what its premises are, how to distinguish different approaches, and where this can lead us to. In this book I will try to change that.

Because investors must understand return sources to achieve replication, I will present them in considerable detail. Thus the early chapters of this book cover some of the same, though updated, ground as two of my earlier books: Risk Management in Alternative Investment Strategies (2002) and Through the Alpha Smokescreen: A Guide to Hedge Fund Return Sources (2005). The discussion of replication techniques and their practical application, however, is entirely new.

How this book is different

As hedge funds grow, so does the number of books about them. But it has taken a long time to see a first handbook dedicated to the topic of replicating hedge fund strategies. This is in part because the financial community is only now coming around to the view that hedge fund replication is possible. As far as I know, this is the first book on the topic. It uniquely focuses ...