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The Little Book of Alternative Investments: Reaping Rewards by Daring to be Different by Phil DeMuth, Ben Stein

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Chapter Eleven

One-Fund Solutions

Destroy All Replicants—or Not?

Unless you have vast personal resources and skill in selecting fund managers, real hedge funds are not going to serve as good diversifiers for your portfolio. A friend has a stockbroker who recently recommended a hedge fund to him with an unbelievably great track record. This is exactly the wrong way to proceed. The rule of thumb is that you start with a survey of the field in relation to your needs and then do 75 to 100 hours of research on any hedge fund manager you select.

If you check your piggy bank, you probably don’t have enough money to buy all the conventional asset classes plus an extra million dollars apiece to get into a sampling of the 10 different hedge fund strategies. If you have a half-million dollars to throw at this you might invest in a hedge fund fund-of-funds, but you still have to pick the right manager, which means you are back to the 75 to 100 hours of research.

No need to despair if this is not your situation. These new hedge-funds-in-mutual-fund-wrappers are going to provide an alternative.

There are two different methods used by these hedge fund mutual funds. Both try to deliver hedge fund performance, but they arrive at this place following completely different routes.

1. Hedge Fund Replicants: A top-down approach to mathematically replicate the returns of hedge fund indexes. We’ll call these “hedge fund replicants,” which has a nice sci-fi ring to it. They recreate hedge fund returns ...

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