When Hindsight Becomes Foresight: Replicating Investment Performance

When the tide goes out, you just find equity exposure

July 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.

This research note was originally published by the CFA Institute’s EI blog.


  • It is challenging to understand all the different types of investment strategies
  • However, most of them simply offer diluted equity exposure
  • This can be demonstrated via simple S&P 500 + cash combinations


We have analyzed dozens of public and private market investment strategies, such as merger arbitrage and private equity, respectively, over the last few years, and one common theme has emerged. Most of the products described in more than 300 research papers simply provide exposure to the stock market in complicated wrappers. Once the tide goes out, the risk exposure is the same everywhere.

We can demonstrate this phenomenon in different ways. The most common approach is to simply run a factor exposure analysis. Investment products marketed as offering uncorrelated returns often exhibit high betas to the stock market, which highlights a lack of diversification benefits (read Myth Busting: Alts’ Uncorrelated Returns Diversify Portfolios).

But there is an even simpler and perhaps more powerful way to illustrate this point: by using a combination of the S&P 500 and cash to replicate the historical performance of an investment product with the same level of risk.

We recently created Time Machine, a freely accessible tool with which investors can replicate the performance of any mutual fund, exchange-traded fund (ETF), or US stock using just the S&P 500 and cash.

To demonstrate Time Machine’s facility on social media, we analyzed the iMGP DBi Hedge Strategy ETF (DBEH), which tracks the 40 leading longshort equity hedge funds, and found that an 81% allocation to the S&P 500 and a 19% allocation to cash would have delivered almost the same performance with the same volatility.