Hedge-Like ETFs No Threat

Date: Thursday, August 23, 2007
Author: Hedge Fund Daily

A new breed of hedge-like offerings are on the horizon that some suggest could pose a challenge to the hedge fund industry, though not likely a threat. According to Investment News, among the growing number of indices aimed at replicating hedge fund returns without the fees is the hedge-like exchange-traded fund, the first of which may be one being developed by Stonebrook Structured Products. Its managing partner, Jerome Abernathy, told IN, that while his hedge ETF is still a couple of years away, he launched in May the Stonebrook Alternative Beta Fund, which used the same strategy. “We think the best use for this product is to deliver hedge-fund like returns for retail investors,” adding, “the promised land for this is an ETF.” While backtesting of the beta fund indicates it would have slightly outperformed the Hedge Fund Research Index over a five-year period, not everyone is impressed by replicators. “People are frantically trying to replicate the performance of hedge fund indexes using all kinds of things, and if you have a back- test that doesn’t do what you want, then you don’t know how to back-test,” Jon Van, chief operating officer of Partner Capital Group, told IN. Several studies on replicating indices have given them mixed marks, and even if they do catch on, not in a big way. By some estimate, replicators can capture at the most 5% of the hedge fund market. They may make their biggest impact on the retail market, according to John Rekenthaler, a v.p. at Morningstar. “As far as I know,” he said in an IN interview, “there’s nothing in the regulations that says we have to protect retail investors from owning a combination of ETFs.” Meanwhile, Professor Harry Kat of London’s Cass Business School, a strong proponent of replication strategies, says he’s solved the problems of clones too closely tracking the stock market with nothing “alternative” about them. Opalesque reports that through his FundCreator approach, he can create a “zero correlation” fund, which would closely resemble what hedge funds strive for