Earlier this month, John Cassidy profiled
Harry Kat, hedge fund replictor. It certainly seemed that Kat’s
business was to replicate the returns that hedge funds generate, if not on a
month-to-month basis then certainly over the medium term.
Rather than trying to emulate a hedge fund’s monthly return—a
nearly impossible task—the researchers sought to match the fund’s
results over a period of several years, as well as the other statistical properties
of its performance that investors were likely to care about most: the volatility
of the returns, their correlation with the stock market, the likelihood of
suffering extreme losses.
In the spring of last year, Kat sent me an e-mail in which he expressed confidence
that he and Palaro would succeed. “It is possible to design mechanical
futures-trading strategies which generate returns with the same, and often
better, risk-return properties as hedge funds,” he said. “This
means investors can have hedge-fund returns but without the massive
fees and all the other drawbacks that come with the real thing.”…
Each night, after the markets have closed, FundCreator downloads financial
data from all over the world and determines what new trades each of its users
needs. When a user logs on in the morning, a red light flashes to indicate
that action is needed. “You just click on it every day, it tells you
what you need to do, you do it, and you get Quantum,” Kat said proudly.
“It’s simple.”
[Emphasis added.]
Now comes the WSJ’s Eleanor Laise, with a much more
skeptical take on hedge-fund replicators in general. Kat turns up at the
end:
Mr. Kat markets a competing approach to cloning that doesn’t aim to match
returns but instead tries to mimic typical hedge-fund characteristics, such
as low correlation to broader markets.
Doesn’t aim to match returns? I’d say that’s a pretty sharp change
of tune from Mr Kat. What on earth does it mean to "get Quantum" if
you don’t get Quantum’s returns?