Advisors looking for alternative investments are likely soon to have an attractive new vehicle: a passively managed fund of hedge funds.
Standard & Poor's on September 17 launched its Hedge Fund Index (HFI), which comprises 40 hedge funds representing three broad styles and nine different investment strategies.
While other hedge fund indexes have been introduced in recent years, this is the first investable hedge fund index. By mid-year 2003, you'll see the first of a series of limited partnerships rolled out by PlusFunds, which has been licensed by S&P to create investment products based on the HFI. The first product is likely to be a fund of funds mirroring the S&P HFI index–investing equally in all of the hedge funds selected to participate in the index. Investors will thus be able to access a diversified group of hedge funds.
It can be difficult to get specific information about hedge funds because they are private investments that are not permitted to advertise, but the additional complication on this new product is that nothing has been filed yet with the Securities & Exchange Commission. However, a source familiar with the plans say the new product will have the same quarterly liquidity opportunity as a traditional hedge fund and offer a way into a broadly diversified set of hedge fund styles at a minimum investment of less than $1 million.
Unlike a traditional hedge fund of funds, you won't have to pay a performance fee to the manager of the index fund. That's so because the manager will not be trying to pick the best hedge fund managers and strategies, since the fund is passively managed to match the index. There are funds of hedge funds already offered that provide broad diversification with similar minimums, but they typically charge a performance fee that gives them 20% of the profits as well as a management fee. The HFI investment fund should offer a way to avoid the performance fee on the manager of the index fund while providing the benefits of a well-diversified basket of hedge funds. Investors in the HFI fund of funds will still need to pay the performance fees and management fees charged by the underlying hedge funds in the index in addition to the management fee of the index manager.
