Liquid hedge fund strategy exposure in an index format

Alternative investments constitute a mainstay of diversified investment portfolios for investors, ranging from high-net-worth individuals to large institutions. Despite occasional fluctuations, over a longer period of time hedge fund assets have witnessed exponential growth, reaching $2 trillion by June 2011.

However, investing in hedge funds has proven to be precarious for some investors. During the past few years, highly publicised events ranging from net-asset-value suspensions to gating or fraud by investment managers have highlighted some of the inherent risks of hedge fund investing, which had previously been ignored or, at the very least, discounted. Today, more than ever, investors place higher importance on the liquidity, transparency and mitigation of counterparty risk in their hedge fund holdings. This shift of priorities has resulted in even more thorough due diligence being carried out on investment managers and more stringent governance requirements for investment companies in general. The due-diligence process is thus lengthier than in the past. It can be further extended by the repetition of the due-diligence process for each new fund invested in the portfolio over time. The long redemption cycles of traditional hedge funds can cause further delays, making the process of portfolio (re)allocation operationally burdensome.