Replicating hedge fund indices may weaken hedge fund justification
The recent practice of replicating hedge fund indices may dispel arguments for having a portfolio allocation to hedge funds, according to a leading executive with Russell Investment Group’s US operations.
“One of the rationales for a hedge fund investment is that they are not correlated with your major market investments. Now, in the US, a couple of the investment banks have started talking about putting out in the marketplace investment products that offer to replicate hedge fund indices,” said Russell US managing director of institutional and research strategy Rob Blackwell.
He believes the method by which these financial institutions are going about imitating the indices is what nullifies the potential portfolio diversification outcome a lot of investors require through hedge funds.
“How do they do that? They go and buy S&P, they buy corporate bonds, they sell treasuries, they’re doing it with public markets. Well, if you can replicate a hedge fund index by investing in public markets, it’s not really telling you that that hedge fund index is uncorrelated with other markets,” Blackwell explained.
Furthermore, he felt that if hedge fund indices can be replicated in this fashion, then perhaps a large amount of the return of hedge fund managers is market driven as opposed to being delivered by strategy and skill, another key reason people find investing in hedge funds attractive.
Blackwell thinks this development may direct investors away from hedge fund managers in preference for more conventional managers.
“My view is that it will encourage investors to look to more traditional managers who are now beginning to offer more hedge fund-like strategies in a more transparent mode,” he said.
“I think there is some really interesting potential there in the development of a different view of what hedge funds are,” Blackwell added.
Recommended for you
With active ETFs becoming the latest choice as fund managers target the retail audience, their high fees may be a detractor as research finds investors are shunning those priced any higher than 50 bps.
The possibility of a dissenting vote from shareholder L1 Capital has led Platinum Asset Management to scrap its conversion plan for the $450 million Platinum Capital LIC into an ETF.
Family office Lederer Group has made an off-market takeover bid for ASX-listed Elanor Commercial Property Fund, with chair Paul Lederer taking exception at the firm’s lack of accountability, oversight and transparency.
Janus Henderson is actively seeking to partner with private wealth firms in Australia as it looks to expand its number of strategic partnerships, as well as focus on retirement income product development.
