Hedge Fund Index Funds Fail to Live up to Promise

Funds that invest in hedge fund indexes, first created in 2002 in response to the tremendous popularity of hedge funds, are failing to live up to their promise, USA Today reports. They typically lag the indexes they track.

Last year, for example, the MSCA Hedge Invest index fund posted 7.3%, a good deal less that the 11.3% delivered by its benchmark, the MSCI Hedge Fund Composite index.

The indexes themselves have problems, too. Because hedge funds are so secretive, it is hard to build a hedge fund index that truly mirrors the universe it is built around. And those that are willing to share information may not be the best performers. Further, these index funds invest in separately managed accounts run by hedge fund managers, which typically post lower gains than the main hedge funds because they are more liquid and incur higher trading costs.

However, Scott Berniker, who works for MSCI Barra, which creates such hedge fund indexes, says they offer many positives, not least of which is diversification, risk management, transparency and the flexibility to move in or out every week, as opposed to the one to two year lockups of hedge funds.