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Credit Suisse to Launch Product That Mimics Hedge Fund Returns

Date: Wednesday, December 5, 2007
Author: Bei Hu, Bloomberg

Dec. 5 (Bloomberg) -- Credit Suisse Group plans to launch a product to replicate hedge fund performance with more liquid securities by the first half of 2008, said Oliver Schupp, a managing director in the firm's alternative investments business.

The product, the first of its kind for Credit Suisse, will seek to mimic hedge funds that bet on a market going either up or down by using ``directional equity strategies,'' New York-based Schupp said in an interview during a visit to Hong Kong.

Switzerland's second-biggest bank is joining peers including Merrill Lynch & Co., Goldman Sachs Group Inc. and Swiss manager Partners Group to offer low-cost clones that use listed securities such as futures contracts to replicate hedge fund returns.

``We find that there's increasing demand for indexation and replication strategies,'' said Schupp. ``Investors want to understand the sources of return and the risk of their hedge fund portfolios and, as such, we expect hedge fund replication to grow in importance.''

The market for products that mimic hedge-fund performance has taken off in the last two years after pension funds and insurance companies baulked at the high fees charged by hedge funds and demanded greater transparency and liquidity. Index-based products are an alternative to investing in a single, actively managed fund of hedge funds.

Partners Group Fund

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits.

A typical hedge fund levies a management fee equivalent to 2 percent of the investment and takes a 20 percent cut of the profit. Credit Suisse's replication product is expected to waive the performance fee and charge a much lower management fee, Schupp said.

Partners Group in October 2004 launched one of the first hedge fund replication products, which had raised more than $1 billion as of May, according a statement on its Web site. It has drawn investors including Universities Superannuation Scheme, one of the U.K.'s five largest pension funds, it said.

Schupp declined to give a fundraising target, fee structure or say what types of instruments the planned Credit Suisse product will trade because the product is under development.

``We are focusing on the directional equity strategies and will have substantial exposure to global equity markets and other equity-related factors,'' he said.

Long Lock-up

Hedge funds managed $1.81 trillion at the end of the September, according to Chicago-based Hedge Fund Research Inc. Institutional investors such as pension funds and insurance companies have replaced high-net-worth individuals as the dominant investors in the industry.

Investments in hedge funds can be locked up initially for several years. After that, investors typically receive monthly reports on performance and are often allowed to withdraw their money with 30 to 90 days' notice. Making significant changes to investments in different hedge funds could hence take three to six months, Schupp said.

Hedge fund replication products that trade listed securities, mainly futures, allow investors to revalue their investments on a daily basis, Schupp said. Such products tend to appeal to institutional investors that already invest in hedge funds and may use the replication products to achieve short-term changes in asset allocations, he added.

The Credit Suisse Tremont Index LLC. has raised over $7 billion from investors for hedge fund index-based products since it made its foray into the area in 2002, said Schupp.

``This year has been our best year ever in terms of new inflows into our products on a global basis,'' he said.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net