- Lipper Hedgeworld.com staff, Chicago.
The fourth quarter of 2006 saw the latest trend in the ever-rolling democratisation of hedge funds: cloning them.
Whether the new methodology will represent just a series of academic advancements in research, or a revolution in hedge fund investing, remains to be determined. The idea is to satisfy the needs of pension plans, which require more and more transparency and liquidity from their managers while expecting to pay less in fees. But replicating hedge fund strategies at a lower cost is really what may be the most promising way to align returns with costs, some academics say. With hedge fund returns produced synthetically, advocates of cloning techniques argue that one can avoid the usual drawbacks surrounding hedge fund investments, including the need for expensive and time-consuming due diligence, illiquidity, lack of capacity, poor transparency as well as style drift issues, and all of that without the high management fees.
It is a simple but memorable message: Sack your fund of hedge funds manager and boost returns. Professor Harry Kat of the Cass Business School at the City of London University believes the idea is compelling and has invented a system to make it a reality. With PhD student, Helder Palaro, Mr. Kat has launched FundCreator, located at www.fundcreator.com, a risk control system that allows investors to design futures trading strategies, which the inventors dub synthetic funds. These funds use 78 futures contracts to replicate different risk-return profiles, offering an alternative to funds of funds. ‘People want to take the cost of their hedge funds down,’ Mr. Kat said in an interview. ‘They realise if they didn't pay 3% plus 30%, they would do better than the 6%–7% average returns that Hedge Fund Research is showing (for funds of funds).’
Goldman Sachs developed a replication tool for roll-out in early 2007, targeting high net worth investors and institutions unable to invest in conventional hedge funds. The Absolute Return Tracker Index, or ART, would be based on a product basket comprising fixed-income, equities, credits, commodities and volatility indexes. The fund will only consider including the most liquid, representative and tradable indexes in each of the five categories. The emphasis on liquidity means that there will be daily trading and, thus, no investor lock-up. One thing ART won’t do is invest in hedge funds. Instead, the aim is to offer a complementary strategy for investors who can't invest in hedge funds to get that performance by others means.
Middle East developments
Kuwaiti asset manager, Global Investment House, in October announced the launch of its new GCC Islamic Index, which will track the performance of Shari’a-compliant companies in Gulf Co-operation Council companies. Omar El-Quqa, executive vice president at Global, said the index ‘establishes itself as the benchmark for Shari’a-compliant investment in GCC countries, introducing the immense Shari’a-compliant investment opportunities available in our regional market.’ The index is composed of the 66 largest Shari’a-compliant companies, and is 100% market cap weighted in accordance with International Finance Corporation formulae. Total market capitalisation added up to around US$141.8 billion as of the close of trading on 1 October.