Smart Beta ETF Portfolios: Cloning Beta Active Hedge Funds

Cloning hedge fund returns is a tricky business. Some hedge fund strategies, like S.A.C. Capital Advisors’ trading in Elan and Wyeth shares off insider tips, cannot be replicated by any algorithmic cloning procedure. On the other hand, returns for many hedge funds appear to be driven by exposures to latent risk factors not readily discernible to average investors. As John H. Cochrane of the University of Chicago observes:

As I look across the hedge fund universe, 90% of what I see is not “picking assets to exploit information not reflected in prices,” it is “taking exposure to factors that managers understand and can trade better than clients.”

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