Index Funds Prove They’re Not The Real Deal

Date: Thursday, February 1, 2007
Author: Dailyii.com

Investable hedge fund indexes are proving they’re nothing like the real thing. According to USA Today, the investments meant to mimic hedge funds have produced less than stellar returns since they were introduced five years ago, trailing not only the stock market but even the indices they’re supposed to be tracking. For example the MSCI Hedge Invest Index topped out at 7.3% last year, while the MSIC Hedge Fund Composite Index ended up 11.3%. Investable HF indices have their advantages – they offer diversification, greater transparency and an ability to move in an out of investments weekly – but they also have a more overwhelming downside. First, the indices are incomplete since they don’t include funds that are closed to investors, funds for which there is no performance data available, and funds that don’t offer weekly liquidity. The outgrowth of this is that investors have no access to the best hedge funds out there. Finally, since most investable hedge fund indices don’t invest in hedge funds directly, investors lose some of their returns to higher trading costs. Also, David Bailin of U.S. Trust told USA Today, "There is a performance trade-off that comes with greater liquidity." Not all investables are created alike, however, and RBC Capital Markets boast direct investment in hedge funds through its RBC Hedge 250 index. "We deliberately created our index to be as representative as possible," Winston Ho, who co-created the index. Whether its approach makes an appreciable difference is unclear. The index finished 2006 up 10.64%, well in the range of major HF indices, but closer to the low end.