Merrill Trumpets "Passive Hedge Funds"

Jason Corcoran

20 October 2006

Analysts at Merrill Lynch claim passive hedge fund strategies could provide a cheaper, more transparent and more attractive alternative to active hedge fund management. New Star Asset Management, which runs funds for UK private investors, this month became the latest long-only firm to launch a passive hedge fund index. Merrill Lynch has devised a way of replicating hedge fund returns by investing in a portfolio of liquid assets such as equities, bonds, currencies and commodities that statistically track hedge fund returns. It said a mechanical replication of hedge fund investing would reduce fees and improve transparency and liquidity. Benjamin Bowler, co-head of global equity-linked research at Merrill Lynch said: "Passive strategies…aim to provide returns similar to hedge funds without the need for active management. Because of their lower cost, we believe these vehicles have the potential to outperform actively-managed hedge fund investments on an after-fee basis." But one leading hedge fund source described passive hedge fund strategies as "an oxymoron." He told WealthBriefing: "I am dubious that doing what they suggest would make anyone any money but it does highlight, again, the point that the average hedge fund manager is no longer anything special.”