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Attack of the Clones

Hedge funds are considered by many investors to be an attractive investment, thanks in large part to their diversification benefits and distinctive risk profiles. The major drawbacks are their high fees and lack of transparency. Research by Jasmina Hasanhodzic and Andrew W. Lo of the Massachusetts Institute of Technology raises the possibility of creating passive portfolios that provide similar risk exposures to those of hedge funds at lower costs and with greater transparency. Hasanhodzic and Lo find that for certain hedge fund strategies, these hedge fund “clones” perform well enough to warrant serious consideration.

As institutional investors take a more active interest in alternative investments, a significant gap has emerged between the culture and expectations of those investors and hedge fund managers. Pension plan sponsors typically require transparency from their managers and impose numerous restrictions on their investment mandates because of regulatory requirements such

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