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Barclays Replicates Closed Hedge Funds

Date: Tuesday, February 10, 2009
Author: Ed Zwirn, Regulation Correspondent, Markets Media Online

Barclays Capital has launched two hedge fund replication products enabling investors to track the global hedge fund industry, including funds that are no longer open to investment.

The two products--the Long Barclays Alternatives Replication (LBAR) Index and the Shortable Barclays Alternatives Replication (SBAR) Index—“can assist clients seeking to maintain the current value of illiquid positions or express a bearish (short) view,” according to Barclays.

The LBAR methodology was developed by the quantitative portfolio strategy team at Lehman Brothers (now part of Barclays Capital Research) and has been funded since October 2007.

“Hedge funds' flexible investment mandates, minimal disclosure requirements, and use of leverage, short selling, derivatives and illiquid securities present serious challenges for any synthetic replication strategy,” said Lev Dynkin, Barclays head of quantitative portfolio strategy, on Monday.

“The replication methodology underlying the Barclays Alternatives Replicators includes several innovations such as reconstitution of incentive fees, use of non-linear instruments and a dynamic optimization algorithm,” he said. “Despite the unprecedented market conditions, the methodology performed well since it was first funded in October 2007 and has outperformed not only the investable HFR index but the main composite hedge fund indices as well.”