<p>Hedge fund replication is now entering its third generation with strategies such as alternative beta and smart beta touting hedge-fund-like returns at a lower cost.</p> <p>Certain strategies using factors do appear to provide effective systematic execution. But low-cost hedge fund replication can also mean lower returns, either because it targets lower volatility or because it captures fewer sources of return. &nbsp;Furthermore, hedge fund replication models tend to perform best in trending markets&mdash;and who can guess when a market is going to trend?</p> <p>Even with the possibilities presented by hedge fund replication strategies, there remains one thing that is missing&mdash;the secret sauce, so to speak.&nbsp; In investment talk, we mean alpha.&nbsp; In layperson talk, we mean the returns generated by the experience and skill of talented hedge fund managers&mdash;the part of the return not solely explained by exposure to risk premia.</p>