Cloning hedge fund indexes circumvents the many challenges associated with direct hedge fund investment. Theoretically, hedge fund indexes could have nonlinear exposures to the economic risk factors that drive their returns and may require nonlinear clones. By using flexible statistical models, we enable the choice between linear and nonlinear clones. We demonstrate that for certain hedge fund styles, nonlinear index clones are crucial for high fidelity replication. Nonlinear clones both facilitate economic insights to cloning and enhance the best linear clones.
AdmatiABhattacharyaSPfleidererP, et al. (1986) On timing and selectivity. The Journal of Finance41: 715–730.
2.
AgarwalVNaikNY (2000) Multi-period performance persistence analysis of hedge funds. Journal of Financial and Quantitative Analysis35: 327–342.
3.
AgarwalVNaikNY (2004) Risks and portfolio decisions involving hedge funds. Review of Financial Studies17: 63.
4.
AgarwalVFungWHLoonYC, et al. (2011) Risk and return in convertible arbitrage: Evidence from the convertible bond market. Journal of Empirical Finance18: 175–194.
5.
AikenALCliffordCPEllisJ (2013) Out of the dark: Hedge fund reporting biases and commercial databases. Review of Financial Studies26: 208–243.
6.
AmencNEl BiedSMartelliniL (2003) Predictability in hedge fund returns. Financial Analysts Journal59: 32–46.
7.
AmencNMartelliniLMeyfrediJ-C, et al. (2010) Passive hedge fund replication—Beyond the linear case. European Financial Management16: 191–210.
8.
BaqueroGHorstJVerbeekM (2005) Survival, look-ahead bias, and persistence in hedge fund performance. Journal of Financial and Quantitative Analysis40: 493.
9.
BookstaberR (2003) Hedge fund existential. Financial Analysts Journal59: 19–23.
10.
BrownSJGoetzmannWNIbbotsonR (1999) Offshore hedge funds: Survival and performance, 1989–95. Journal of Business72: 91–117.
11.
CapocciDHubnerG (2004) Analysis of hedge fund performance. Journal of Empirical Finance11: 55–89.
12.
CarhartMM (1997) On persistence in mutual fund performance. The Journal of Finance52: 57–82.
13.
ChenZFosterDGallagerD, et al. (2013) Does portfolio emulation outperform its target funds?Australian Journal of Management38: 401–427.
14.
Diez de los RiosAGarciaR (2011) Assessing and valuing the nonlinear structure of hedge fund returns. Journal of Applied Econometrics26: 193–212.
15.
DuanmuJLiYMalakhovA (2020) Capturing hedge fund risk factor exposures: Hedge fund return replication with ETFs. The Financial Review55: 405–431.
16.
FamaEFFrenchKR (1993) Common risk factors in the returns on stocks and bonds. Journal of Financial Economics33: 3–56.
17.
FungWHsiehDA (2000) Performance characteristics of hedge funds and commodity funds: Natural vs. spurious biases. Journal of Financial and Quantitative Analysis35: 291–308.
18.
FungWHsiehDA (2001) The risk in hedge fund strategies: Theory and evidence from trend followers. The Review of Financial Studies14: 313–341.
19.
FungWHsiehDA (2002) Hedge-fund benchmarks: Information content and biases. Financial Analysts Journal58: 22–34.
20.
FungWHsiehDA (2004) Hedge fund benchmarks: A risk-based approach. Financial Analysts Journal60: 65–80.
21.
GetmanskyMLeePLoA (2015) Hedge funds: A dynamic industry in transition. The Annual Review of Financial Economics7: 483–577.
22.
GiamouridisDPaterliniS (2010) Regular(ized) hedge fund clones. Journal of Financial Research33: 223–247.
23.
GiannikisDVrontosID (2011) A Bayesian approach to detecting nonlinear risk exposures in hedge fund strategies. Journal of Banking & Finance35: 1399–1414.
24.
HasanhodzicJLoAW (2007) Can hedge-fund returns be replicated? The linear case. Journal of Investment Management5: 5–45.
PattonAJRamadoraiT (2013) On the high-frequency dynamics of hedge fund risk exposures. The Journal of Finance68: 597–635.
32.
PayneBTreslJ (2015) Hedge fund replication with a genetic algorithm: Breeding a usable mousetrap. Quantitative Finance15: 1705–1726.
33.
PedersenLH (2015) Efficiently Inefficient. Princeton, NJ: Princeton University Press.
34.
RamseyJB (1969) Tests for specification errors in classical linear least-squares regression analysis. Journal of the Royal Statistical Society. Series B (Methodological)31: 350–371.
35.
SharpeWF (1992) Asset allocation. The Journal of Portfolio Management18: 7–19.
36.
SimonianJWuC (2019) Factors in time: Fine-tuning hedge fund replication. Journal of Portfolio Management45: 159–164.
37.
SubbiahMFabozziF (2016) Hedge fund allocation: Evaluating parametric and nonparametric forecasts using alternative portfolio construction techniques. International Review of Financial Analysis45: 189–201.
38.
TitmanSTiuC (2011) Do the best hedge funds hedge?Review of Financial Studies24: 123–168.
39.
VrontosSDVrontosIDGiamouridisD (2008) Hedge fund pricing and model uncertainty. Journal of Banking & Finance32: 741–753.
40.
WallersteinETuchschmidNSZakerS (2010) How do hedge fund clones manage the real world?The Journal of Alternative Investments2010: 37–50.
41.
WoodS (2006) Generalized Additive Models: An Introduction with R. Boca Raton, FL: CRC Press.
42.
WuWChenJYangZ, et al. (2021) A cross-sectional machine learning approach for hedge fund return Prediction and selection. Management Science67: 3985–4642.
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
