Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Index Replication Strategies

Another way investors can obtain exposure to the diversified returns of a wide population of hedge fund strategies is through index replication. Index replication products are offered by index providers, banks, and dealers and are designed to create products that deliver the approximate hedge fund returns using factor exposure analysis and market proxies. The index replication product offered by Hedge Fund Research, Inc., is called HFRq. The product is designed to efficiently maximize the correlation to the HFRI Fund Weighted Composite Index (HFRIFWI). This is achieved by investing in factor exposures that generate an aggregate replication portfolio that mimics hedge fund returns, even during volatile market scenarios. The HFRq process is systematic and transparent and utilizes exchange-traded futures contracts to replicate factor exposures and returns found in the hedge fund composite. This results in the ability to offer investors diversified hedge fund–like returns with daily liquidity, transparency, and pricing.

Replication products offered by HFR and other firms have been gaining in popularity with investors due primarily to their lower fee structure, enhanced liquidity, and higher transparency than are available from most multistrategy hedge funds and FoF products.