Seizing on an anticipated increase in demand for alternative investments, a Greenwich, Conn.-based firm has rolled out an investible hedge-fund-tracking index that offers liquidity and transparency.
Seizing on an anticipated increase in demand for alternative investments, a Greenwich, Conn.-based firm has rolled out an investible hedge-fund-tracking index that offers liquidity and transparency.
TrueBeta LLC’s index is designed to replicate the performance of the broader hedge fund universe through portfolios made up of liquid market indexes.
By not actually investing in hedge funds, the index is able to avoid the net worth and income restrictions that typically prevent retail investors from gaining exposure to the asset class.
TrueBeta does not yet have a licensing agreement with any money management firms to offer access to its index, but it is offering access to a separately managed account of the index for a $5 million minimum.
Once the index is licensed, it will have much lower minimums and could be offered in a range of product formats, including exchange-traded funds and structured products, according to company founder and chief executive Rabbe Ekholm.
The index was created using a factor-based replication process, which involves re-creating the risk characteristics of the underlying strategy.
“With factor-based replication, you want to re-create the returns of the market opportunity with a risk profile that makes sense,” Mr. Ekholm said.
On a back-tested basis, the TrueBeta Index generated a gain of 2.7% over the five-year period from May 2004 through August 2009. Over that period, the S&P 500 experienced an annualized decline of 1.5%.
In 2008, when the S&P 500 fell by almost 40%, the TrueBeta back-tested results showed a loss of 21.7%.
“Even though hedge funds were pummeled last year, it became clear that they still are a better mousetrap, because they relatively outperformed long-only investments,” Mr. Ekholm said.
He is hoping the firm’s index will appeal to investors looking for alternatives to traditional stocks and bonds, but without the “headline risks” associated with many alternative strategies.
“We’re seeing a true evolution of the investment process, and hedge funds represent a maturing asset class that is becoming a serious and important part of a portfolio,” he added.
Another key element of the index is a 1.65% management fee, and none of the performance fees typically associated with alternatives.
“Since the vast majority of hedge fund returns come from beta, there is no need to pay high fees for base-line performance,” he said. “We encourage investors to focus on real alpha generators in their manager selection and leave the beta to us.”
