With a little financial engineering, Dow Jones Indexes may some day be entering the brave new world of hedge fund cloning, but not soon, despite media reports suggesting the contrary. For the record, Dow Jones spokeswoman Naomi Kim, says, “Dow Jones Indexes is not in the process of launching a tracker index for hedge funds strategies. I’m aware that there is a recent news story that says otherwise, but the article was misleading.” Already DJI has a bunch of hedge fund indices that invest in HFs via managed accounts. What was interesting in media reports was that DJI is pondering a new index that will skirt the managed accounts – and clients could escape the fees -- and produce hedge-like results by investing in the same assets that the real things select. “Theoretically,” says DJI Executive Director John Prestbo in a Financial Times interview, “we can build a model that mimics the behavior of the hedge funds, adding that he is “confident that it will happen” after “talking to institutions.” Prestbo believes this new index will work best in those strategies that depend on market factors and have enough liquidity –namely, long/short equity, equity neutral, convertible arbitrage and fixed-income arbitrage. And the attack of the clones probably won’t happen in the current environment. “When markets are going up, that doesn’t breed change,” says Prestbo. “When markets turn, different arrangements must be made.” Such as when hedge funds shut down for lack of alpha. “We have gone through a period where everyone can proclaim to be a hedge fund manager,” Prestbo told FT. “That kind of nonsense will be weeded out by these indices.”
