Credit Suisse sets up hedge fund clones

[kickysnana]

By Steve Johnson in London
Published: March 9 2008 17:33

Credit Suisse will on Monday unveil a plan to muscle in on the nascent and potentially lucrative hedge fund replication industry.

The Swiss bank has teamed up with three top academics in the field, professors William Fung and Narayan Naik of London Business School and David Hsieh of Duke University, to create products that replicate mechanically the returns of the major hedge fund strategies.

Investment banks, including Merrill Lynch, Goldman Sachs and Deutsche Bank, have scrambled to launch hedge fund clones in the past 18 months. CS will launch three clones mimicking directional equity strategies, relative value arbitrage and tactical trading strategies.

<snip>

Fees will be in line with the industry, typically 100-120bp a year.

http://www.ft.com/cms/s/0/686eea7a-edfc-11dc-a5c1-0000779fd2ac.html?nclick_check=1

[Mojorabbit]

1. I wish I understood what this means

I thought hedge funds were in trouble all over. Now they want to clone them? I should have taken an economics class when I was in college.

[aquart]

2. I swear to you, it wouldn't have made it make one bit more sense.

[gravity]

3. Most hedge funds are doing fine

and are relatively safe investments. A small minority blow up and get a lot of media attention, but the number of stocks that go bankrupt each year are much higher.

The attractive thing about hedge funds is that they usually go for market neutral strategies, focusing on absolute returns. An example of this would be going long on the strongest oil stocks, while going short on the weakest in the sector. In theory this should provide returns if the market goes up or down.

Now in practice, hedge funds generally outperform the market in bad times, like right now, but underperform the markets in good times. There are a few stellar funds that can consistently outperform the markets, but the returns on most funds are quite boring.

I don't have a subscription to FT, but this article is probably talking about mutual funds that have strategies similar to hedge funds, which are becoming more popular. Since we are in a bear market, people want funds going for absolute returns, instead of just losing less money than the Dow.

Hedge funds have a diverse range of strategies in trying to get the most absolute returns. Usually the more complicated strategies are usually the ones that are at the greatest risk or blowing up. I would think that mutual fund managers are more restricted in their strategies so that they won't be doing anything to dangerous.

I am skeptical that these funds would actually outperform other mutual funds or an index fund, but that is a different matter. If these mutual funds managers could provide above average returns, they would be working in a real hedge fund since they could be making a lot more money there. The real winners of hedgefunds are the managers, because they are able to get the rich to pay huge fees for average performance.

I hope this has demystified hedge funds for you. Only the few best and worst get all the attention, while the rest aren't too spectacular. The best investment advice would be to ignore them.

[Mojorabbit]

4. Thanks

your explaination helped a great deal!

[kickysnana]

5. Ditto n/t