Asset Replication
"To folk who want to invest in hedge funds, as well as those who want to invest like hedge funds, Markov Processes has a lot to offer."
MPI is regarded as an innovator and leader in establishing best practices in Asset Replication investment methods and services. Through its applied research and expertise in quantitative modeling and optimization, MPI has innovated in both passive and active hedge fund replication products. Hedge funds’ attractive risk-adjusted return potential, along with well documented limitations with direct hedge fund investing such as high fees and low liquidity, have served as the basis for MPI’s initial focus in alternative Asset Replication product initiatives. Similar to Asset Allocation as a specific investment discipline, Asset Replication product design and portfolio construction relies on very specific methods, know-how, and financial technologies to ensure successful index tracking and precision in order to realize inherent risk-adjusted performance benefits.
Hedge Fund Indices: An Important Asset Class
Research paper co-authored by MPI studies the statistical properties of equal-weighted indices of hedge funds and re-frames the conversation around alternative index products as an asset class with attractive investment characteristics.
- Better performance than 50% of underlying funds
- Better risk than 60-70%
- Better Sharpe Ratio than 60-70%
All the above risk/return "guarantees" with no due diligence effort and no liquidity risk.
Such index is not investible but could be replicated with liquid assets.
The Importance of Precision in Asset Replication
Precision of replication is crucial for retaining all of the above (HF index) benefits as high tracking error inevitably leads to lower performance or higher risk than that of the index or both.
Regression models traditionally utilized in replication of hedge fund indexes have largely fallen short on their promise and “failed in thorough empirical tests to produce satisfactory results on an out-of-sample basis…” * “To capture and create more precise asset replication products, particularly the conditional distribution of hedge fund returns, one would need to rely on truly conditional factor models, allowing for time-varying factor exposures”* such as dynamic factor models. (Amenc, N., W. Gehin, L. Martellini, and J. Meyfredi (2008) "Passive Hedge Fund Replication: A Critical Assessment of Existing Techniques." Journal of Alternative Investments, V.11, No. 2, Fall 2008, pp. 69-83.)
MPI’s Patented Dynamic Factor Model (DSA™) allows one to reverse-engineer and even replicate complex dynamic investment strategies:
- True dynamic analysis: no rolling window gimmick
- Prevents over-fitting by selecting predictive factors
- Senses rapid strategy/leverage changes
- Applicable to funds with very short histories
- 10-years in making. Patent protected (U.S. Pat. No. 7890406, 8001032)
MPI Asset Replication™ Services
MPI provides customized Asset Replication services to a range of investment-focused organizations. A notable engagement is its most recent Asset Replication service arrangement with Commerce Asset Management and AdvisorShares anticipated launch of an active long/short Alternative Investment Index ETF.
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Products
- Institutional Software
- Advisor Software
- Asset Replication
- Hedge Fund Analysis Software
- Professional Services
- Data
Chaired Panel Presentation
EDHEC-Risk Forum
Partnership with AdvisorShares and Commerce Asset Mgt.