Hedge Fund Clones

Goldman Sachs has set up a hedge fund replication tool in a move that could lead to a shake-up of the $1,300bn hedge fund industry.

With a minimum investment of £10.00 ($19.87)and £10.00 Issue Price, Goldman’s Absolute Return Tracker index will undercut the high fees of the hedge fund sector with a 1% flat fee. Hedge funds and funds of funds can charge 47%. At maturity, the investor receives a one-for-one exposure to the performance of theiiindex return.

According to the Financial Times the tracker is set to be among the first of a flood of hedge fund cloning products likely to be launched in a revolution being compared with the arrival of index trackers in the mutual fund world a generation ago. “There is a lot of dead wood in the industry – people who should not be running hedge funds,” said Harry Kat, professor of risk management at London’s Cass Business School, who has just launched his own hedge fund replication tool.

Replication strategies are based on academic research that suggests hedge fund performance is largely driven by movements in underlying markets, such as equity, bond and commodity prices, rather than the intrinsic skill of managers.

Goldman has spent two years developing the algorithm that underpins its platform. The performance characteristics of thousands of hedge funds will be fed into the system monthly and Art is designed to decompose these data and calculate the aggregate position of the hedge fund universe. This position can then be replicated, potentially allowing Goldman to generate hedge fund performance at a fraction of the cost.

It will be far more liquid, with trading available on a daily basis. “This may be ideal for any large institution that has been looking at hedge funds but doesn’t like the fact that it takes six months to put money [in] and to take it out again,” said Edgar Senior, executive director in Goldman’s fund derivatives structuring team.