Institutional Investor's Alpha Magazine - March 2009 - (Page 53) In Focus Hedge Fund Replication Hedge Fund,Walks Like a Hedge Fund By Nick Rockel edge funds are supposed to thrive in a down market — and 2008 certainly provided a chance for the well-paid people who run them to work some upside magic. Instead, most of these managers made huge sums of money disappear. So much for skillbased alpha. Put to the test during last fall’s sell-off, hedge funds looked almost as hapless as long-only money managers. By December many former top funds were down 40 to 50 percent on the year. Then along came the Bernard Madoff scandal — a stark reminder that transparency actually does matter. Investors braced for billions more in losses, courtesy of fund-of-hedge-fund firms that fell prey to the disgraced financier’s alleged Ponzi scheme. Before all this pain transpired, Michael Powell — head of alternative assets at Liverpool-based Universities Superannuation Scheme, the U.K.’s second-biggest pension fund — had been telling people that the average hedge fund manager was no wizard, an assertion he has had plenty of opportunity to repeat of late. “The number of funds that can consistently generate alpha at the net return is relatively small,” Powell says. “Where we can identify alpha, we are willing to pay an appropriate fee for it, but we do Looks Like a Replication, once the purview of academia, is catching on as investors try to mimic the best managers. MARCH 2009 • INSTITUTIONAL INVESTOR’S ALPHA • 53
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