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New Star to launch unique access to hedge fund industry performance


Date: Thursday, October 12, 2006
Author: Hedgeweek.com

New Star Asset Management (New Star) is pleased to announce the launch of Hedge ETS, a London listed daily tradable security, providing access to performance representative of the hedge fund asset class through investment exposure to the RBC Hedge 250 Index.

The Index was launched on 1 July 2005 and is designed to be a representative, investable benchmark of the performance of the hedge fund asset class. The Index has the following key features:

  • extensive diversification across over 250 hedge funds and nine distinct strategies;
  • asset-weighted by strategy, equally-weighted initially by hedge fund;
  • rules-based construction methodology designed to emphasise inclusiveness and minimise selection bias;
  • inclusive selection criteria which includes hedge funds that are closed, have lock-ups, redemption gates and low liquidity;
  • total assets under management of the hedge funds in the Index were US$192 billion (1 September 2006), representing approximately 20% of industry hedge fund assets under management (source: RBC Capital Markets).
Performance of the Index

Since its inception on 1 July 2005 to 31 August 2006, the Index has closely tracked returns on hedge funds and outperformed other recognised hedge fund investable indices.

Annualised return
Volatility
RBC Hedge 250 Index110.1%4.2 %
Average Non-Investable Index211.9%4.5 %
Average Investable Index37.1%
3.3 %

1 Returns are net of monthly Index charge of 1/12 of 0.95 per cent of the Index level. USD returns to 31 August 2006, data at 27 September 2006 Source: Index returns - RBC Capital Markets, calculations - Mellon Analytical Services.

2 Average Non-Investable Index does not include any index fees and is an equal weighting of the HFRI Fund Weighted Composite Index, MSCI Hedge Fund Index and Credit Suisse/Tremont Hedge Fund Index. USD returns to 31 August 2006, data at 27 September 2006. Source: Index returns - Bloomberg, calculations - Mellon Analytical Services.

3 Average Investable Index is net of estimated index fees and is an equal weighting of the HFRX Global Hedge Fund Index, MSCI Hedge Invest Index and Credit Suisse/Tremont Investable Hedge Fund Index. USD returns to 31 August 2006, data at 27 September 2006. Source: Index returns - Bloomberg, calculations - Mellon Analytical Services.

Hedge ETS

Hedge ETS is a unique security offering daily liquidity, the ability to redeem shares close to net asset value and 1X (unleveraged) shares and 3X exposed shares.

Hedge ETS will obtain exposure to the Index through a contract with Royal Bank of Canada and be subject to a management fee.

Shares are being issued under a global placing (outside US) and a public offer in the UK. UBS Investment Bank are acting as sponsor to Hedge ETS. Royal Bank of Canada Investment Management (UK) Ltd and UBS Investment Bank are acting as placing agents.

Two types of shares are being offered; 1x shares, which offer unleveraged exposure to the performance of the Index and 3x shares, which target three times exposure to the performance of the Index. Under the placing, both are available in Euro, Sterling, US Dollars and Canadian Dollars, with a minimum investment per placee of EUR 50,000, GBP 40,000, USD 75,000 and CAD 80,000 respectively.

In order to assist in the management of any discount to net asset value, up to 14.99 per cent of the shares in issue may be purchased in the market. In addition, each shareholder will have the opportunity to redeem up to 100 per cent of their shares at close to net asset value, on the first business day of January or July in each year, subject to providing at least 120 days' prior notice and the Hedge ETS directors exercising their discretion to offer redemptions.

The offer is expected to close on 21 November 2006 and the placing on 22 November. Dealings in shares are expected to commence on the London Stock Exchange on 28 November 2006.

'Hedge ETS offers unique access to the performance of the hedge fund asset class through a well constructed index and the added benefit of daily liquidity,' says Ravi Anand, New Star's head of structured products. 'We believe that Hedge ETS is the most representative investable benchmark for hedge fund industry returns and should be attractive to both institutional and sophisticated private investors seeking to benefit from the portfolio diversification benefits provided by hedge fund returns.'

Background notes: New Star Asset Management is an asset management group, listed on the London Stock Exchange's Alternative Investment Market with US$35 billion of assets under management (at 31 August 2006), including approximately US$1.7 billion in hedge funds. New Star will manage Hedge ETS and undertake regular due diligence on the Index. New Star will receive an investment management fee of 0.85 per cent. per annum of the net asset value of the 1x shares and 1 per cent. per annum of the net asset value of the 3x shares.

There are approximately 9,000 hedge funds globally with approximately USD1 trillion of assets (source: Hedge Fund Association). The average non-investable hedge fund index references approximately 1,600 hedge funds whereas the average investable hedge fund index references approximately 90 hedge funds. Source: see notes 2 and above

The composition of the RBC Hedge 250 Index at 1 September 2006 was:
StrategyWeightNo. of Funds
Equity Long/Short36.8%92
Multi-Strategy14.3%38
Credit12.2%31
Merger & Special Situations10.9%27
Macro8.8%23
Managed Futures5.9%15
Fixed Income Arbitrage5.6%15
Convertible Arbitrage3.0%9
Equity Market Neutral2.5%7
TOTAL100%257