Monday, September 20, 2010

Opalesque Industry Update — Source now offers a truly passive approach to alternative investment, with the launch of two ETFs tracking the Merrill Lynch Factor Model strategy. This strategy, developed by BofA Merrill Lynch, aims to generate similar performance to funds-of-funds without investing directly in hedge funds. Instead, the Model uses a portfolio of six liquid and well-known market indices to replicate the global performance of hedge funds. The BofAML Hedge Fund Factor Source ETFs are available in US Dollars and Euro and will be listed on the London Stock Exchange and Xetra respectively. They are highly liquid, UCITS III compliant and have a 0.7% per annum management fee.

Although the performance potential of hedge funds is attractive, there are still strong deterrents for some investors: lack of liquidity, lower transparency and single manager risk. The Merrill Lynch Factor Model was designed to generate similar returns to the broad hedge fund universe from a transparent portfolio of well-known market indices. Historically, the model has achieved returns comparable to the HFRI Fund Weighted Composite Index, a recognised benchmark for the hedge fund industry.

Commenting on the launch, Source CEO Ted Hood said: “Some investors love the idea of hedge fund exposure but find the potential illiquidity problematic. The new Source ETFs aim to provide broad, generic exposure to the hedge fund industry, without investing in individual hedge funds. These ETFs could be particularly interesting as part of a core-satellite approach, in combination with some top class individual managers, or as a liquid cash management solution for funds-of-funds.” These products are the latest additions to Source’s “alternative” range, which aims to complement Source’s existing range of exchange-traded equity and commodity products.

According to Eric Personne, co-head of Cross Asset Retail Structured Products Sales at BofA Merrill Lynch,these ETFs are a natural evolution in the alternative investment realm: “The Merrill Lynch Factor Model now has over four years of live track record, demonstrating its ability to consistently deliver cheap beta exposure to the hedge fund asset class through a liquid, transparent portfolio. Offering this through a Source ETF makes it even more accessible to investors, retaining the focus on liquidity and transparency, and with the additional benefits of an exchange-traded investment.”