IN THE PAST year, several investment banks have launched products that purport to give investors hedge fund-type performance without the need to actually invest in hedge funds themselves. Known variously as hedge fund replication strategies, hedge fund clones or alternative beta products, the strategies offer what sounds like the ideal alternative investment.
By simply buying a structured note from an investment bank, investors can, so the marketing goes, get exposure to the risks and rewards of hedge fund investing while avoiding the usual negatives of high fees, a lack of transparency, lock-in periods and capacity constraints. Merrill Lynch and Goldman Sachs opened the field last year with the launch of the Merrill Lynch Factor Model and the Goldman Sachs Absolute Return Tracker Index. Then, in May this year, Deutsche Bank launched its Absolute Return Beta Index. JPMorgan has announced that it intends to launch its own alternative beta index. Some fund managers have started to offer the strategy in fund format.
"Our approach is to offer full transparency, daily liquidity and low cost," says Darren Fortunato, director in the financial products group at Merrill Lynch in New York.