You are treading controversial waters. It's hard to summarize, but at the risk of oversimplifying, there are three broad schools of thought:
- "Linear Models": Classic Examples are a string of papers from Jasmina Hasanhodzic
and Andy Lo at MIT (scholar.google.com should give you plenty). For similar work related to Mutual Funds that you may be able to repurpose you should look at the classic "Sharpe Returns Based Style Analysis (aka RBSA)" upon which most linear approaches are based.
- "Non Linear and 'Mystery' models': (i.e. details undisclosed) models. Classic example is from the infinitely entertaining Harry Kat et al (examples include "Tell Me What You Want, What You Really, Really Want!" but if you google it, you'll need to add some sort of hedge fund replication tag to avoid getting nothing but Spice Girls references)
- "It's not easy": Classic examples here are hard to find, but the most eloquent (and imho unbiased) are from Amenc et al at EDHEC. Examples include "Performance of Passive Hedge Fund Replication Strategies"
The short version, sadly, is that the general feeling (amongst the majority of academics, at least imho) is that what you are asking about is not easy to truly "clone" :-( but check out the references above anyway, perhaps you'll spot something new and interesting.
Having said that, many academics (and, apparently, some of your commenters) feel that most hedge fund "alpha" is really beta disguised as alpha. In that case, depending on what you mean by "replicating returns of a hedge fund" you may or may not have an plausible task on your hands. Replicating the "beta" portion of a hedge fund may indeed be possible. The classic reference here is probably any of the string of papers by Fung and Hsieh (again, scholar.google.com is your best friend).
Bottom Line: it's a matter of opinion and if you had a more precisely stated question, you might get a more precise answer. I hope that helps at least a little :-)
