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July 01, 2002 at 08:00 PM
NEW YORK (HedgeWorld.com)–Standard and Poor’s has teamed up with PlusFunds to create an investable hedge fund index expected to launch in the third quarter.
The new S&P Hedge Fund Index is intended to establish a standard benchmark and medium for investing within the alternative investment asset class, which is rapidly gaining global acceptance among institutional investors such as pension funds, banks and insurance companies.
The index itself will be comprised of 40 individual hedge funds, divided into three broad sub-indexes–arbitrage, event-driven, and tactical. Underlying fund strategies included are global macro, long/short equity, managed futures, special situations, merger arb, distressed, fixed-income arb, convertible arb and equity market-neutral.
Bermuda-based PlusFunds will act as investment manager for the fund, which will be accessible to institutional investors and high-net-worth investors. A third-party partner, Somerset, N.J.-based Derivatives Portfolio Management will verify fund valuations and Albourne Partners Ltd., London, will lead due diligence screening.
To be included in the S&P Hedge Fund Index, a hedge fund must pass due-diligence muster. Funds will be measured to ensure a track record is not marred by style-drift. Funds must also provide daily transparency. “There will eventually be about 40 managers, a number we’re getting close to,” said PlusFunds principal Chris Sugrue.
From the point of view of established players in the hedge fund industry, the new S&P Hedge Fund Index might look more like a fund of funds than it does an index. But the new product is different in another way, according to Mr. Sugrue. “The fee structure is less than you might expect from a fund of funds. The only other fees on top of those for the underlying managers is a additional cost that comes out to about 90 to 95 basis points (per year),” Mr. Sugrue said.
“On the investment side, individual funds will be running money in managed accounts,” Mr. Sugrue said. “From the investors point of view, it will be a standard T+1 situation in that valuation numbers will be available to be viewed in aggregated form daily.
“That’s important because you’re applying the principals and practices that are standard to the traditional side,” he said. “This is about making hedge funds something less exotic and something more domesticated. … Some of the strongest interest we have seen early on has been from U.S. mutual fund complexes who have wanted to see something like this,” Mr. Sugrue said.
An index committee managed at Standard & Poor’s will meet regularly to review the hedge funds in the index and rebalance if necessary. S&P expects to announce the index composition and methodology by the third quarter.
“One of the things that will be looked at in maintaining the index is a manager’s excess capacity,” said Paul Aaronson, an executive managing director at Standard & Poor’s. “A lack of capacity is one of the reasons a manager might be removed from the index. On the other hand, we’ve made efforts to ensure that these won’t be funds below a certain level of capitalization either.”
