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Replicating hedge fund performance

Professor Harry Kat of London's Cass Business School says investors can earn greater returns at a fraction of the cost by replicating hedge fund performance.

In, "Hedge-Fund Returns Can Be Matched Without Fees", Bloomberg gives us the low down on Kat's findings.

Synthetic funds would have outperformed 82 percent of the 2,000 hedge funds and 500 funds of hedge funds studied by Kat, a former head of equity derivatives at Bank of America Corp. Most of the gains generated by hedge funds were eaten up by fees, typically 2 percent of a portfolio and 20 percent of profits, he found after studying 15 years of monthly fund results.

``In most cases, managers aren't good enough to make up for the massive fees that they charge,'' said Kat, a professor of risk management at Cass, part of London's City University, in an interview. ``The combination of excessive fees and minimal opportunity in the market makes alternative investments really doubtful in terms of their value for portfolios.''

The story goes on to mention that Professor Kat's "Fund Creator" system will replicate the performance of any fund and has been shown to return 10 percent a year. This compares with returns of 6 to 7 percent after fees for the average hedge fund studied.

Sound realistic?

Update: The All About Alpha blog has included a link to Kat and Palaro's research papers on hedge fund returns. To read the papers, open the links and scroll down to the "SSRN Electronic Paper Collection" heading. There you can choose a source from which to download the document in PDF format.

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