MSN MoneyCentral – Rules-based passive hedge fund strategies could provide an increasingly attractive alternative to active hedge fund management as the industry continues to mature according toMerrill Lynch (MER) analysts. They expect strategies will increasingly emerge that aim to replicate hedge fund performance – either by using liquid assets like stocks or by mechanically executinghedge fund strategies – enabling investors to achieve similar returns to hedge funds with lower fees. Investors in such instruments may also benefit from greater liquidity and transparency.

No asset class has seen such tremendous growth as hedge funds have seen over the past 15 years and few financial instruments command such high fees. “Passive strategies, some of which are increasingly the focus of academic research, aim to provide returns similar to hedge funds without the need for active management. Because of their lower cost, we believe these vehicles have the potential to outperform actively-managed hedge fund investments on an after-fee basis,”explains Benjamin Bowler, co-head of Global Equity-Linked Research at Merrill Lynch.

Greater competition should fuel interest in passive alternatives

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