Conclusions Caveats and Summary Results

The linear clones were shown to perform well for some hedge fund style categories. Overall, by taking similar risk exposures, the clones were able to earn similar expected rates of return as hedge funds but with: (1) lower-fees, (2) greater amount of transparency, (3) scalability with the use of leverage, and (4) more liquid assets. The caveats to the results are that

(1) the performance varies between the fixed-weighted and the rolling-window clones,

(2) some hedge fund strategies are nonlinear with option-like payoffs (like Capital Multiplication Partners), (3) the model only used a small sample of liquid securities, and (4) transactions costs were not included in the analysis.

Figure 7 summarizes the relative performance metrics of the top two hedge fund categories and bottom two hedge fund categories of the 11 hedge fund strategy categories evaluated in this topic.

Figure 7: Top Two and Bottom Two Hedge Fund Category

Hedge Fund Category

Performance Metric and Corresponding AIM

Highest Average Value

2nd Highest Average Value

2nd Lowest Average Value

Lowest Average Value

Sharpe Ratio (AIM 77.2)

Convertible Arbitrage

Fixed Income Arbitrage

Managed Futures

Dedicated Short Bias

Alpha (intercept) from 6-factor model (AIM 77.4)

Emerging Market

Event Driven

Fund of Funds

Managed . Futures

Contribution of Manager-Specific Alpha to Total Return from the 6-factor model (AIM 77.4)

Dedicated Short Bias

Equity Market Neutral

Managed Futures

Convertible Arbitrage

Difference between Returns of Fixed-Weight Linear Clone and Actual Fund (AIM 77.5)

Managed Futures

Global Macro

Event Driven

Emerging Markets

Difference between Returns of 24-Month Rolling-Weight Linear Clone and Actual Fund (AIM 77.5)

Managed Futures

Dedicated Short Bias

Event Driven

Emerging Markets -

Serial Correlation (AIM 77.2 and AIM 77.6)

Convertible Arbitrage

Fund of Funds

Dedicated Short Bias

Managed Futures

Renormalization Factor for Leverage (AIM 77.6)

Managed Futures

Global Macro

Convertible Arbitrage

Fund of Funds

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

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