|
|
 |
|
| Risk & Reward |
An Alternate Route Through the Hedge Fund Maze
Laurence Neville
12/01/2003
|
Finally, investors need to remember to ask the most important question: How do I get my money out? "If the index product has higher liquidity than the funds which it includes, investors may be charged for that privilege [of liquidation]—often up to 5 percent of asset value," says Schmidt. "The only alternative would be if there is an active market in the index product with a buyer available for every seller. That is unlikely." Ultimately, how much do issues such as disclosure and the liquidity of underlying funds matter to the individual investor? As Thane Stenner, international wealth adviser and author of True Wealth: An Expert Guide, points out, all hedge fund products suffer from these tribulations.
"The diversification automatically built into this type of structure significantly reduces the risks inherent on the liquidity issue, as well as the lack of transparency caused by the ‘blind pool’ structure [of hedge funds in the index; a blind pool means the hedge fund manager has total discretion in deciding how to invest]—while of course muting the returns somewhat along the way," says Stenner.
To be sure, it is vital to understand what the product you are buying represents. But an index-linked product should reduce risk through diversification, while significantly reducing costs. As Schmidt notes, many of these issues are only of interest to academics and professionals. He says: "For high net-worth investors, the crucial factor is performance."From Your Side of the Table: Essential questions to ask
your adviser about hedge fund index-linked products.
 What are the constituents of
this index and why?
Why funds are selected and removed
from the index could have significant
consequences for performance. Not
all indices include all hedge fund
investment styles.
 Is the index rule-based or
decided by committee?
If the former, is its weighting going to remain representative of all types of hedge funds or simply track popular strategies?
If the latter, how is the committee chosen? What are its guidelines?
|
|
|
|
|
|
|
