Computers Replacing Hedge Fund Managers? Clones - Absolute Return Tracker Index

Discussion in 'Wall St. News' started by ByLoSellHi, Dec 5, 2006.

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    Hedge fund managers pride themselves on finding profits where the rest of the market is not looking. But the very success of these managers, as shown by the wealthy and institutional investors who are lining up to write them checks, has spawned a new breed of competitor. At least two investment banks have created hedge-fund replication products, sometimes called hedge fund “clones,” that will try to mimic the investing patterns of hedge funds — but charge a fraction of the fees.

    The Financial Times reported Monday that Goldman Sachs is launching the Absolute Return Tracker index, which will attempt to reproduce the investments of thousands of hedge funds by looking at monthly performance data for the industry. According to the article, “performance characteristics of thousands of hedge funds will be fed into the system monthly and Art is designed to decompose this data and calculate the aggregate position of the hedge fund universe, which can then be replicated.” In other words, the index will try to reverse-engineer what hedge funds are buying, and then make those same investments.

    Merrill Lynch has also launched a similar product called the Merrill Lynch Factor index, BusinessWeek reported.

    Steven Cohen of SAC Capital can probably rest easy. Many experts say these clones are not likely to put the top hedge fund managers out of business. By their nature, these tracking devices will be averages, and so they will not capture the extremely high returns that the best-managed individual funds can produce. “The typical hedge fund investor may not wish to effectively trade in their Ferrari for a potentially more reliable — and arguably boring –Buick,” Jeff Keil, principal at fund consultancy Keil Fiduciary Strategies, tells BusinessWeek.

    But others, including Breakingviews, suggest that clones could have a profound effect on the hedge-fund business, in much the same way index funds have changed the world of mutual funds. Since they were introduced, index funds have provided an attractive alternative to mutual funds run by mediocre stock pickers, often generating similar returns with lower fees.

    A hedge fund might charge its investors a 2 percent management fee and a 20 percent performance fee; Goldman’s ART index is charging total annual fees of just 1.01 percent, MarketWatch reports.

    John Godden, chief executive of hedge fund consultancy IGS Group, tells Reuters that Goldman’s hedge-fund tracker iwill “hit a nerve,” but he notes that because such indexes will rely on monthy hedge-fund data to pick their investments, they will operate with a delay. This could be dangerous in volatile markets, he says.

    This monthly lag is just one of “two fundamental flaws” that Greg Newton describes in his blog posting on Goldman’s new clone. Writing on Naked Shorts, he says the other flaw is this:

    Where, exactly, is the ART machine going to source the “performance characteristics of thousands of hedge funds” when the tracker, with its one percent fee and that brand in big brass letters on the offering document, puts everybody else out of business?
  2. You mean to say that they're going to launch a "mystery product" that is nothing more than their own version of the S&P-500?