Optimal composition of hedge fund replicators in South Africa

Abstract

The purpose of this paper was to explore the passive replication of hedge fund returns as an alternative means of investment. Current popular techniques have generally shown poor out-of-sample performance. This research aimed at creating an equity factor model through the use of the "style engine" created in Muller and Ward (2013). The sample hedge funds were used to create both single period and multi period rolling window portfolios of styles. The model was able to portray the investment styles of the selected samples and imitated the in-sample performance well. However, many of the out-of-sample clones showed severe under performance and suffered systematic breaks.