MarketWatch – More hedge-fund indexes are on the drawing board, and they’re fundamentally different from those already in the market.
Existing indexes measure the returns of hedge fund managers, sorted by the various types of strategies they pursue (equity long/short or convertible arbitrage, for example). The indexes with the mostmanagers represented would seem to be the best reflection of this investment product, following the logic that the broader an index is, the more accurately it reflects the market it’s measuring.
Trouble is, these broad indexes aren’t investable because many funds in them — typically the best-performers — are closed to new investors. These indexes’ juicy returns, which help lure investorsto the product, aren’t in fact attainable.
Hedge fund indexes that are investable simply limit their components to funds still open to new customers. The number of funds in them ranges from 145 in the MSCI Hedge Invest Indices, to 34 in thesix Dow Jones Hedge Fund Strategy Benchmarks.
While these investable indexes have attracted several billion dollars of investment capital, they run far behind funds-of-hedge-funds, currently with about 40% of the estimated $1.5 trillion in hedgefund assets. Funds-of-funds take investors’ money and parcel it among the best fund managers they can find. In return for this diversification service, they collect a fee (generally, 1% of assets and10% of returns, annually) on top of the steep fees (2% of assets and 20% of annual returns) charged by the hedge funds themselves.
