The most recent issue of the New Yorker has an interesting story about an economist/ statistician who has written a computer program to mimic the medium-term returns of specific hedge funds using a relatively mechanical futures-trading strategy. Harry Kat, now a professor of risk management at Cass Business School (City University, London), worked trading derivatives before moving into the academy. To design his software, he relied on databases of historical hedge fund performance to figure out how to mimic the most important statistical properties of each fund's results--returns, volatility, correlation with the stock market, the likelihood of large losses. The program is called FundCreator, and it has developed some following among institutional investors. Kat undercuts the hedge funds' two-and-twenty (see Vic--the go-to guy on the tax issues--here and here and here) by a wide margin, charging only about one-third of one percent of money invested.
It may be too early to tell if the program "works," but it's certainly cheaper than hedge funds' two-and-twenty charges (or the effective three-and-thirty charges for funds of funds).
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