2007 A Breakout Year For Replication?

Date: Tuesday, January 16, 2007
Author: Dailyii.com

In the next half decade, hedge fund replication strategies may account for 40% of managed HF assets, and the drive in that direction is likely to take hold this year. So suggests Dr. Lars Jaeger of Partners Group, developer of the firm’s Alternative Beta Strategies program, which launched in 2004. "I predict that within the next three to five years, a significant proportion of hedge fund assets will be managed this way," Jaeger told HedgeWeek, noting that even if the approach grabs a 10% share of the total, that could amount to $150 billion. But he has greater expectations, when he says "it could easily reach as high as 20, 30 or 40% within five years." Jaeger explained that replications will grow increasingly attractive as they produce better returns without an extra layer of fees, which can save between 220 and 330 basis points. He pointed to the fact that his beta program has outperformed Hedge Fund Research’s HFRX Index by an annualized average of 4.6%. Besides, said Jaeger, the reality is that that 80% of returns are credited to beta. Another attraction to such programs such as ABS, he said, in addition to the lower fee structure (1.25% management fee/15% performance fee, payable only on netted performance), they could add another 40 to 80 bps by using futures and options traded on margin. Jaeger suggested that with more and more companies introducing such replication products -- notably Merrill Lynch and Goldman Sachs -- 2007 will be a breakout year, as they attract not only disgruntled HF investors, but also those who have stayed out of alternatives because of the issues raised about them.