Can We Really “Clone” Hedge Fund Returns? Further Evidence

While investors generally consider hedge fund investments as pure alpha products, academic research has shown that hedge funds earn most of their returns from systematic exposures. Jaeger and Wagner (2005), among others, argue that hedge fund returns are derived from a mix of traditional and alternative beta exposures and skill-based returns. Alpha is simply defined as the part of the returns that cannot be explained by exposure to systematic risk factors and is a measure of the manager’s skill. Traditional beta is generated as part of the returns derived from long-only investing, while alternative beta is the return that can be specified in a systematic way, but which involves techniques often used by hedge funds, such as leverage and short-selling (Anson, 2006).