GLOBAL - Replication could "turn the hedge fund industry on its head" and pension fund demand for such strategies is on the rise, Partners Group has claimed.
Lars Jaeger, who heads up the Partners Group Alternative Beta Strategies (ABS) programme, said the firm had received marked interest "from big pension funds in both the US and UK".
He added: "Replication has triggered tremendous interest, and I would even suggest it could turn the hedge fund industry on its head."
The ABS programme replicates hedge fund returns by identifying their generic risk premiums, and Jaeger claimed "several" investment banks had already announced plans to launch similar hedge fund replication programmes.
The ABS programme currently has US$660m in assets under management, and it is predicted the fund could exceed $1bn by end 2007, after it recorded a 133% increase in 2006.
Jaeger said hedge fund returns had fallen in recent times to around Libor +200 range.
"Hedge fund alpha is diminishing, the trend is quite clear."
Jaeger added that, contrary to what a lot of hedge funds claimed, a large part of returns did not come from alpha, but beta.
"Given the declining returns, and the significant role of beta, it became clear there was a need to readdress hedge fund fees," he explained.
"You can attribute about 300-500bps to all the fee layers, and that was what we kept in mind when we began developing this strategy."
The ABS performance fee is only paid on netted performance, while most portfolio of hedge funds aren't, he claimed.
"In other words, if six of our 19 strategies lose money, the loss of those six would have to be made up by the other 13 before fees are calculated," said Jaeger. "Also, there are not financing costs for leverage in our programme."
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