Wonder how the hedgies feel about their trades being data mined and their systems backward calculated. That arises from their business with Golden Snax. Then they lose their business to the new product developed off of their trades and labors. In the software world, that's called piracy, c.f. the DMCA and its permutations. In the trading world, its called innovation. Classic.
It's really just a hedge fund index tracking fund. As such, it will only approximately replicate the performance of a hedge fund index and not of an individual fund. Managers of individual funds that are able to outperform aggregate HF indices will still add value and be able to charge fees accordingly. It's just another reason not to invest in funds of hedge funds for anyone that needs another reason.
The question really is: will they make an investable benchmark index out of this (e.g. an ETF). This could eventually put a lot of heat on sub-par performing FOHFs.
Personally I think FOHF are a terrible thing to put money into. If you are investing with HFs then you should be investing in the strategy and the ability of the management to produce excess returns in specialist niche areas of the market. A FOHF completely negates the benefits of investing in something exceptional by producing an average HF return with additional fees. I am also sceptical about the accuracy that this new alternative will provide in being able to track performance. It might work to some extent with a long/short equity fund index but returns from many other strategies would be difficult or impossible to replicate.
To answer my own question i suppose it might be possible. Consider oil: If in Febuary the net long positions all the hedge funds in Oil are down 50% from January, then i suppose the fund would reduce its exposure by 50% also. Repeated across lots of instruments it might approximate things.
Prof. Kat's collaborator, Helder Palaro, posted a link to their working paper "Hedge Fund Returns: You Can Make Them Yourself!", back in Sep. 2005: http://www.elitetrader.com/vb/showthread.php?threadid=56310 You can download it there for a 15-page (up from 13 pp. a year ago ) overview of how it's done and links to 4 other, more technical papers, also by them. Good stuff. Sometimes I miss my hedge fund days... but only momentarily.