Replicas: Have Hedge Funds Re-Resurrected as Traditional Beta?

Abstract

We find market risk factors explain up to 81% of North American and Asian hedge fund portfolios’ variance, while out-of-sample clones have up to 98% correlation with realized returns. So-called “market neutral” funds take on significant short-term market bets, where rolling beta clones display up to 74% correlation with realized returns. Overall, returns attributable to skill declined systematically, with clones outperforming hedge fund indices. In our novel event study, we demonstrate clones are resilient to drawdowns, outperforming the market during China's COVID-19 lockdown and the WHO's pandemic announcement; 10-day market-adjusted CARs ranged from 2.46% – 9.71% for these dates.