But what is new about ART? Some index providers already offer the possibility of purchasing hedge fund indices. However these indices only consider funds open to new investors and non-investable funds are not part of these indices. Returns from investable and non investable funds generally differ. This fact is related to the controversial ability of hedge fund indices to report accurately the return on the universe of hedge funds. There are two reasons why well known hedge fund indices might not reflect accurately the returns of the industry. One reason is because non-investable funds will probably not be eager to report information. There is no regulation that forces funds to report information and information is generally voluntarily provided. Second reason why current indices do not track the return of the universe of funds is survival bias. This means that these indices do not take into account those funds that disappear because of bad performance (biasing the returns). A hedge fund tracking index seems to be a bit more complicated than an ETF (Exchange Traded Fund) were shares are bought, prices are publicly known and delisting rarely happen within the year. So these two issues make current indices a limited investment product. But what Goldman is providing is something a bit different that is not free of replication errors. Based on econometric methods, they can replicate the return of the universe of funds and relate these returns to a few set of assets that if simultaneously bought could replicate the return of the funds universe.
Has this absolute return tracker anything to do with a Fund of Funds? The answer to this is no. A Fund of Funds will choose from the whole universe of funds, a portfolio of hedge funds that will suit their clients’ demand for return and risk. Their success will thus lie in their fund-picking ability. On the other hand the fund tracker index will not distinguish among funds and will just try to achieve the return provided by the overall hedge fund industry (probably a value weighted average return).

The absolute return tracker seems to have some value as an investment vehicle and its cost seems to be very reasonable. However some caveats should be beard in mind, and we will discover it some other time in this blog. Having said that, there seems that others are following Goldman, such as MSCI, and hedge fund trackers will probably replicate the success that ETFs have had.