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December 22, 2003 at 07:00 PM
This is the first in a series examining what’s ahead in 2004, from the viewpoints of several industry experts.
NEW YORK (HedgeWorld.com)–Large-scale institutional allocation to hedge fund indexes is among the developments industry people expect in 2004.
This is part of an ongoing growth trend, but investable indexes may offer a solution to difficulties institutions face in making hedge fund investments. For instance, many pensions, insurance companies and other organizations lack experience in this market. Accessing it via an investable index is a lot easier than picking individual managers.
During the past couple of years, several firms introduced such indexes, including Standard and Poor’s, Morgan Stanley Capital International, Credit Suisse First Boston/Tremont* and Hedge Fund Research. Typically an index has separate accounts with managers, providing transparency and liquidity.
“Volume is picking up very quickly,” said Bruce Lipnick of Asset Alliance. “There is demand from institutions that don’t have the infrastructure to look at hedge funds but are familiar with indexing–they already have trillions of dollars in various indexes.” Boards understand passive investing, and now that index platforms have become available, they can apply that idea to hedge funds.
Asset Alliance has filed a registration statement with the Securities and Exchange Commission for an index fund based on futures managers .
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There are reports that some index operators are starting to raise a lot of money.
“We think in next six months to a year, you’ll see dramatic increases in allocations through that market,” Mr. Lipnick said.
Institutions are likely to be particularly concerned about pricing of hedge fund portfolios after complaints on that score at multi-billion dollar manager Clinton Group. Index funds, however, are better protected against valuation problems–in many cases an independent third party prices the separate account.
Another issue is that many hedge funds would be overwhelmed by a single allocation from a large institution, which can run to US$100 million a clip. When that amount is put into an index, it is spread among scores of managers. Again, the index provides a practical solution for the institution.
