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Passive hedge fund investing in vogue

Date: Wednesday, February 21, 2007
Author: Michelle Baltazar, Finacial Standard

The Credit Suisse/Tremont Hedge Fund Index Tracker Fund attracted an impressive US$5 billion of investor money in the past two years, proof that more investors want hedge fund performance but at "index" fees.

“While the [tracker] fund was set up in July 2002, it’s really only picked up in the last couple of years. The bulk of our funds now [US$5 billion] were from 2004 to 2006,” said Oliver Schupp, the US based managing director of alternative investments for Credit Suisse Securities.

Schupp said the fund, which hugs the Credit Suisse/Tremont Hedge Fund Index, charges a flat fee of 1 per cent. “But the key difference is that investors don’t have to pay [hedge fund] performance fees,” he said.

Schupp also highlighted that for an industry that is traditionally opaque, their indexing methodology gives investors more transparency and disclosure about the hedge funds they are investing in.

For example, the Credit Suisse/Tremont Hedge Fund Index is derived from a database of more than 4,500 hedge funds. Of this, more than 400 funds make it to the index and represent around US$450 billion in assets. Credit Suisse and Tremont regularly examine the funds’ audited financials, yearly performance track record and monthly return calculations.

Schupp said this enables them to understand the funds better, record the return patterns and spot glaring financial irregularities. If a fund returns $1.2 billion one month and $2 billion the next then Credit Suisse might call for an explanation, Schupp said. This is especially critical in the hedge fund sector where manager fees are tied to performance.

Besides increasing the sector's transparency, Schupp said they might soon introduce new sub-categories such as commodity-specific, credit-linked and insurance-linked hedge funds to their current suite as more and more of these specialist products enter the market.

Michelle Baltazar