New Star tracker aims to end selection headache
New Star Asset Management is to launch a passive hedge fund index tracker, designed to replicate industry performance better than other instruments currently available. The product targets non-US wealth managers and institutions “that want to allocate to hedge funds, but do not want to get involved in manager selection or selection of funds of funds managers,” explained Ravi Anand, a director of New Star AM. The fund, listed in London and tradable daily, aims to track the RBC Hedge 250 index, in theory the first of its kind to use investable hedge funds exclusively. By creating this rules based-index last July, RBC intended to avoid the selection bias of managed accounts, which many hedge fund indices tend to employ, said Winson Ho, managing director at RBC. With many of the better hedge funds closed to new investment money or unwilling to increase operational complexities associated with managed accounts, only certain managers, “not the top guys”, are willing to accept index money, he explained. But because managed accounts are very liquid and highly transparent, managers compromise representativeness for the sake of making the index investable. They also sacrifice performance – as managed accounts are generally small, averaging $1.5bn (?1.2bn) and tend not to perform well – just to get the index approved by their internal risk management function, states Mr Ho. The concept has received a cautious welcome from established wealth managers. “There is a general philosophical difficulty with indexation in the hedge fund space. Because of the extreme diversity of the underlying investments, building an index that can be truly representative of hedge fund returns available out there is more difficult than ever,” said Ravi Bulchandani, head of alternative investments, Europe & Middle East at Morgan Stanley Private Wealth Management. “But the closer we can get to a proper representation of hedge fund returns, the better to all of us. It is hard but it is worth doing. I think that there will be continued attempts to accurately deliver representative performance from this space in the future”. Having being invested in hedge funds on an open platform for almost 10 years, RBC has been able to create an index representing hedge funds with $192bn (?152bn) of assets, one fifth of the total industry. “Each fund cannot have more that 1 per cent weight, to avoid events like the recent situation at Amranth, the hedge fund which lost $6.5bn in one day, which can have major effect on the index,” said Mr Ho. “RBC has to deliver the performance of the fund and it is up to them how they decide to hedge it,” said Mr Anand. In addition to the normal version, private investors will also be able to get a geared exposure (3 times exposure) to the returns of the index, which in the 14 months to the end of August has delivered an annualised 10.1 per cent. This compares to 11.9 per cent returned on average by non-investable indices, “which have a very positive selection bias as they include non-investable, i.e. closed funds”, and the 7 per cent of the average investable index.
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