Bank Julius Baer is considering structuring a series of algorithms that will aim to mimic the performance of certain hedge fund strategies. The idea is to base tradeable indices on the algorithm-driven trading accounts and then offer derivatives on these indices to investors.
So-called hedge fund beta replication is a hot area right now, with firms including Goldman Sachs and Merrill Lynch offering similar indices. It has been touted as a means of getting access to hedge fund returns without hefty management fees or liquidity restrictions, but also without any bonus returns that could be generated by a stellar manager.
Yoshiki Ohmura, head of alternative risk trading at Baer in Zurich, said the firm is only at the research stage right now. "This is a pet project, we have a lot of research to do," he said, noting for example the firm will need to decide whether to replicate single strategies or a broader sweep of hedge fund returns. It would then need to test and calibrate the algorithms.
The advantage of the model-based indices as opposed to hedge fund of fund-based indices such as HFRX and FTSE Hedge, is that "derivatives would be super easy to price on this," noted Ohmura. Investment notes, leveraged or capital protected and linked to the indices, could then be sold to both institutional and private investors.
