DJI plans hedge fund ‘clone’ launch

By: Steve Johnson, FT.com
Published: November 13, 2006

It was bound to happen.  According to FT, Dow Jones is planning a hedge fund clone so we can invest “without having to pay the high fees demanded by the industry, typically a 2 per cent annual fee and a 20 per cent performance fee.”

But waaaaaait a second…We’ve seen this movie before.  It was called, “Investable Hedge Fund Indices”.

Remember how much money we were all going to save by buying these passive funds of funds instead of regular active funds of funds?  No more “1 and 20” fees-on-fees, we were told.  But at the end of the day, these products charged only slightly less than actual fund of funds.  In other words, index providers priced just below the market rate for a fund of funds, not at the (allegedly much lower) cost to create the index.  We expect the same thing to happen with these clones.

In addition, there seems to be confusion over some very basic make-or-break principles here.  John Prestbo, executive director of Dow Jones Indexes lists the strategies he thinks can be cloned quite easily.  According to FT, he includes “equity neutral” in this list.  But even Harry Kat of London’s Cass Business School – who has dedicated himself to cloning new life forms in alternative investing – says equity market neutral can’t be easily cloned:

“You can explain up to 60-70 per cent of the return for funds of funds specialising in equity long/short; you can call that replication,” he said. “For equity market neutral, the fit will be a lot less.”

Research from Yale University and the London School of Economics backs him up on this.

So let’s not get too excited about this development until we see the products roll off the assembly line.  In the meantime, beware the Mongolian Military Officer.

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