|Send in the Clones? Hedge Fund Replication Using Futures Contracts|
|Nicolas P.B. Bollen and Gregg Fisher|
Replication products strive to offer investors some of the benefits of hedge funds while avoiding their high fees, illiquidity, and opacity. We test
whether a replication algorithm can deliver the diversification and high Sharpe ratio that investors seek. Our procedure constructs monthly clone
returns out-of-sample using fully collateralized futures positions held for one-month, with position sizes determined using rolling window
regressions. Clone returns have high correlation with their hedge fund targets, indicating replication is possible. Clones also have high correlation
with a buy-and-hold investment in stocks, however, and neither the targets nor their clones demonstrate successful time variation in factor loadings.