Low-cost 'clone' for funds launched
By James Mackintosh
Published: November 28 2006 02:00 | Last updated: November 28 2006 02:00
A hedge fund emulator has been launched by a London academic in an attempt to replace expensive fund managers with a far cheaper automated system.
Harry Kat, professor of risk management at Cass Business School at London's City University, is charging fees of just 0.36 per cent a year for investments made using futures trades provided to customers each day.
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The move is thought to be the first in what is expected to be a series of low-cost hedge fund "clones", which aim to provide the market-based element of hedge fund performance without the fees. Most hedge funds charge 2 per cent a year plus 20 per cent of profits. Funds of hedge funds typically add a fee of 1 per cent of assets and 10 per cent of profits.
If cloned funds are a success, it could put pressure on hedge fund fees, which have mostly been ignored by investors who generally choose to withdraw money in response to poor performance rather than demand lower fees.
Prof Kat said that in large-scale tests his system beat 82 per cent of funds of hedge funds. He said the idea was to "get rid of the managers without getting rid of the returns".
"Hedge fund fees are high and don't seem to be coming down while the returns get worse every year," he said.
Several other academics have been working on similar approaches, with one in the US and another in London in talks with investment houses to launch hedge fund clones. Dow Jones Indexes is also discussing the idea of adopting a model that mimics hedge funds by investing in the same assets.
Prof Kat and colleague Helder Palaro have been trialling their "FundCreator" system with 21 possible users, who log in to a secure website each day to be told by the computer model which futures trades to make. A couple are discussing licensing the system to produce funds into which outsiders could invest, potentially creating a low-cost alternative to hedge funds.
Prof Kat hopes to use profits to fund extra research assistants. Although legal structures have yet to be put in place, the website, linked in to futures prices, is already offering access.
Partners Group, the Swiss alternative fund manager, offers its own system, Alternative Beta Strategies, but has higher fees that are closer to those of active managers.
Narayan Naik, professor of finance at London Business School, said funds of hedge funds did better than passive replicator models - but only before fees. "There are a few good guys [among the fund managers], no question," he said. "But after paying fees and transaction costs, is there anything left over for the investors?"
Copyright The Financial Times Limited 2006
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