Will The Robot Revolution Kill Hedge Funds?

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Okay. So maybe androids aren't about to storm Greenwich quite yet. But as more and more money pours into alternative investments, you can bet that there will be more and more alternative alternatives. The outsized profits made by hedge fund managers are bound to decrease since the barriers to entry are relatively low. The party's not over yet but the prettiest girls may have already left the building. [Sorry. Forgot we banned that particular metaphor.] The androids are dreaming of assets under management.

Hedge-fund investors could earn greater returns at a fraction of the cost, according to research by Cass Business School Professor Harry Kat, who designed software to automatically mimic funds' trading profits.
Synthetic funds would have outperformed 82 percent of the 2,000 hedge funds and 500 funds of hedge funds studied by Kat, a former head of equity derivatives at Bank of America Corp. Most of the gains generated by hedge funds were eaten up by fees, typically 2 percent of a portfolio and 20 percent of profits, he found after studying 15 years of monthly fund results...
Kat and colleague Helder Palaro set up their ``FundCreator'' system to replicate the performance of any fund by identifying heavily traded futures that show the same volatility and risk characteristics over time, he said. Investors will pay 0.03 percent of the value of their portfolio for the information that they could then use to trade through a broker.
The system produces returns of about 10 percent a year, Kat said, compared with 6 percent to 7 percent after fees for the average hedge fund he studied.

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