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Attack Of The Clones

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Credit Suisse is getting into the replicant business. “The Swiss bank has teamed up with three of the leading academics in the field, Professors William Fung and Narayan Naik of the London Business School and David Hsieh of Duke University, to create a suite of products designed to replicate mechanically the returns of the major hedge fund strategies,” the Financial Times reports.
Hedge fund cloning tends to make hedge fund managers uncomfortable, as clone funds attempt to replicate strategies of major funds while charging lower fees. Some fund managers insist that replication is impossible because the investment and trading skills of managers cannot be duplicated. But academics and investors in replicant funds believe that skill is overrated. They are convinced that hedge fund performance is mostly a function of the performance of various asset classes rather than investment skill.
But could hedge fund cloning create systemic risk? Replicant funds may be vulnerable to the cascade effect witnessed last summer, where the liquidation of one or more hedge fund portfolios triggered a widespread sell-off that saddled many funds with their worst losses ever. Many market watchers now believe that the losses were exacerbated because so many funds were following very similar strategies. Since then some hedge funds have tried to adopt strategies that differentiate them from other market players. Cloning hedge funds seems to move in the opposite direction.
Credit Suisse to set up hedge fund clones [Financial Times]