Top-Down, Bottom-Up, Upside-Down: Rethinking Replication Risk

Hedge fund replication is often framed as a simple choice between “top-down” factor models and “bottom-up” risk premia. But when viewed through the lens of model risk, that story flips. Factor replication lets risk emerge from data, while risk premia hard-codes assumptions at the design stage. For investors, the real question isn’t just how returns are captured, but whose risk assumptions they are underwriting — the market’s or the modeler’s.