In the previous sections, it was argued that replication products have the potential to provide many of the benefits that motivate investors to allocate to hedge funds. Namely, they could act as both return enhancers and risk diversifiers. This section examines the benefits that are somewhat unique to replication products and are generally not offered by most hedge funds. These represent the strongest rationales for the development of various replication products and the reasons why some investors consider allocating to them. Whether the unique benefits provided by hedge fund replication products makes a strong case for increased allocations to these products depends, primarily, on the investor's initial reason for investing in hedge funds. If access to some unique sources of risk premium (e.g., illiquidity) and skills displayed by top-tier managers are the main reasons, then replication products will not be considered viable alternatives to hedge funds. On the other hand, if the goal is to capture the alpha and the beta that are represented by the benchmark that underlies the replication product, then these products may be attractive to some investors. The two key questions in this discussion are:

1. Can one identify top-tier managers a priori, and do managers display significant persistence in their performance?
2. Can hedge fund replication products track performance of various strategies during different market cycles?

Regarding ...

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