Harry Kat: Changing His Tune?

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?

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