Elephantstrunk

Emmanuel Derman will be relieved to know that I agree with him when he says of his favourite (Harry Kat I think) approach to hedge fund replication:

But it requires so much statistics on such poor data that it’s hard to swallow.

But he doesn’t get off the hook that easily, I want more. If the problem with replicating hedge fund returns is that you don’t know what they are, how do you know that you want them? There is something odd about the whole approach. Trading strategies can reproduce all sorts of things, is some correlation to dimly perceived hedge fund behaviour really the exciting option? Is there no better saleable payoff or characteristic that can be wrung out of systematic trading of equities? How would you tell if a payoff added value when priced with models that say it has none?