Investors Flee 'Investable' Indexes like the Plague!

Go figure. In recent years, well-heeled investors have piled into hedge-fund index funds that promise to track the performance of the booming industry while spreading risk across many investments, much as an index mutual fund tracks the component companies of a broad stock index. Critics said these so-called investable hedge-fund index funds trailed the very indexes they tracked.

WEll, investors are starting to notice, pulling money from the investable index funds recently after putting an estimated $12 billion into them, most of that in 2003 and 2004. Assets invested in indexes run by Hedge Fund Research Inc. this year are down almost 8% to $2.4 billion, according to the Chicago company.

About 25 hedge-fund index providers -- including Dow Jones & Co., publisher of The Wall Street Journal -- seek to gauge the industry's ups and downs by compiling performance data from any number of funds to serve as a proxy for the whole industry's prospects. Eight of these providers offer products that allow investments in their hedge-fund indexes, sometimes by licensing them out to money managers, as Dow Jones does. Investors' money is pooled and put into some of the hedge funds underlying the indexes.

The indexes aren't a great snapshot of the broad hedge-fund universe. Some of the indexes exclude funds that haven't been in operation for at least two years. That is an understandable effort to insist upon a track record, but it leaves out poorly performing start-up funds as well as funds that rocket up from day one.

The result is that many investable index funds don't reflect some of the industry's highest fliers. "Because of the requirements investable indexes have, in terms of needing funds to be open to new cash, they tend to get the second-tier funds, as the best funds are closed to new cash," said Francois-Serge Lhabitant, head of research at alternative investment group Kedge Capital in London.

And oh, did we mention that investable indexes also add extra fees? They typically charge customers an annual fee of 1% to 2% of assets, on top of the hefty fees paid to the underlying hedge funds.

Next time, you think people will listen to us? N-a-a-a-ah!

http://online.wsj.com/article/SB115759516417455980.html?mod=mkts_main_news_hs_h