HEDGE FUND REPLICATION STRATEGIES: THE GLOBAL MACRO CASE

This paper performs and analyzes hedge fund replication strategies using liquid exchange-traded instruments to build linear multi-factor models (“clones”) that mimic Hedge Funds returns. First, we follow Hasanhodzic and Lo (2006) six-factor model, using Barclay Hedge Indexes monthly returns for the period of January 1997 to August 2017 on seventeen hedge fund strategies. Next, we introduce variations and new propositions to the model in order to obtain closer risk-return characteristics, focusing on one particular hedge fund strategy: Global Macro. Finally, we use these results to base our conclusion and propose applications for this method.Our findings promote the use of shorter month period in rolling-windows approach and monthly rebalancing strategy for a faster reaction and adaptation to market conditions. Also, it suggests the addition of a strategic-specific factor to obtain better expected-return replications. These findings are particularly relevant to institutional investors that need diversification and could benefit from this asset class exposure, but many times are restricted from investing in hedge funds due to their high fee structure, illiquidity, and opaque tactics.