FundFire: Three Myths about Hedge Funds and the Replicator Challenge

The performance of hedge fund replication has exposed three myths about hedge funds, writes Andrew Beer of Beachhead Capital.


Myths die hard. Ten years ago, well-respected researchers concluded that simple, low cost replication-based portfolios could match or outperform illiquid, high cost hedge funds. On cue, legions of funds of funds managers and consultants whose jobs depend on selling “mysterious and opaque” hedge funds leaped to the defense of their products.

Well, a decade later, the data is in, and the critics were wrong.

The performance of hedge fund replication exposed three myths about hedge funds:

1. Hedge funds are absolute return vehicles that generate returns uncorrelated to equities.

2. Hedge funds make money from the illiquidity premium.

3. We only pick hedge funds that will outperform.

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March 15, 2017