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Alternative beta applied—an introduction to hedge fund replication

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Abstract

Motivated by the surge in popularity of passive hedge fund investments, the present article discusses the concept of “alternative beta” and its implications for the hedge fund industry. The article covers a variety of topics, ranging from the basic rationale for hedge fund replication to replication methodologies and products to the academic and financial market environment. We find that with their radical departure from the hedge fund hallmark of alpha delivery, passive replication products represent the next generation of hedge fund investing, and offer the catalyst for further development of the matured hedge fund industry. Further, we show how the alternative beta concept contributes to a proper separation of alpha, and thus enhances the overall efficiency and quality of hedge fund returns. The article also demonstrates that hedge fund replication can take several different forms. In conclusion, we believe that passive hedge fund products have the potential to consistently outperform mediocre (funds of) hedge funds on an after-fee basis.

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Authors and Affiliations

  1. Faculty of Economics FB7, Chair of Finance, University of Bremen, Hochschulring 4, 28359, Bremen, Germany

    Roman Tancar

  2. DWS Investment GmbH, Deutsche Asset Management, Mainzer Landstrasse 178-190, 60327, Frankfurt am Main, Germany

    Jan Viebig

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  1. Roman Tancar
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  2. Jan Viebig
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Correspondence to Roman Tancar.

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Tancar, R., Viebig, J. Alternative beta applied—an introduction to hedge fund replication. Financ Markets Portfolio Manage 22, 259–279 (2008). https://doi.org/10.1007/s11408-008-0079-5

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  • DOI: https://doi.org/10.1007/s11408-008-0079-5

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