The index needed to reach several billion dollars in assets before shorting was viable. "We needed a particular critical mass on the long side to do it," said Godden. The syndicated rollout will have a cap of a couple of hundred million dollars and will enable banks "to write any structured product with a put function to it," he added. The fund will be offered to HFR partner banks such as Barclays Bank, Bear Stearns, Deutsche Bank, Dresdner Bank, Lehman Brothers and ABN Amro.
"[The fund] is a cash investment. It gets a Treasury return," explained Godden. The fund pays interest, plus the negative performance of the index or minus the positive performance. "If the index goes up, the fund has to pay. It needs the cash to do that," he explained. The fund will carry an 80 basis point fee and have a $10 million investment minimum. The banks will in turn set their fees and terms for the end-users. "This is not for the [average investor]. It's for serious professional users."
HFR is considering subsequent issues that might offer a similar shorting ability for its single-strategy indices, said Godden. This will depend on the success of this first launch and there are also capacity issues to be considered with some strategies, such as convertible arbitrage and merger arbitrage, because of the limited size of the markets and the HFR indices, he added.