Deutsche Bank launches ETF of hedge funds

Deutsche Bank has launched an exchange-traded fund (ETF) giving investors direct access to hedge funds through a managed account platform for the first time. The product was scheduled for release in January but had been delayed.

The fund tracks the DB Hedge Fund Index, which reflects the performance of a number of hedge fund strategies on a three-day time delay. The strategies are weighted in accordance with their prevalence in the industry and include equity hedge, market neutral, credit and convertible arbitrage, systematic macro and event-driven strategies.

In the global hedge fund industry's worst year, back-tested returns on the index were -9.19% for 2008. Between March 2007 and February 2009, the euro-denominated index was up by 48.49%, according to the bank.

Hedge funds have suffered greatly as a result of disrupted global markets. Massive redemptions have forced many managers to limit or suspend investor withdrawals. Meanwhile, the alleged US$50 billion fraud by New York-based broker Bernard Madoff has shown some funds of funds to have inadequate due diligence.

While it may not be perceived to be a great time to release a hedge fund product, Manooj Mistry, London-based head of DB X-trackers Structuring, says the product alleviated some of the difficulties associated with the recent market trauma. "The ETF wrapper gives you intra-day liquidity, and because the product is based on managed accounts, there's no scope for gating or suspending liquidity," says Mistry.

The underlying investments in hedge funds are made through Deutsche Bank's managed account platform. A managed account is held by a prime broker but managed by an external hedge fund manager, which the bank says will ensure liquidity and transparency, and help guard against risks such as style drift or fraud.

The ETF carries management fees of 0.9% per annum - cheaper than most hedge funds, which generally garner a 2% management fee plus a 20% fee for any outperformance. The investment is also tax-transparent in Germany and Ucits III-compliant, according to the bank.

Such benefits will help spur interest from clients such as pension funds, corporates, high-net-worth individuals, insurers and long-only fund managers, says Mistry.

Over the next few weeks, Deutsche plans additional listings for the ETF on Borsa Italiana, the Swiss Exchange and the London Stock Exchange. The bank is also considering a listing in Asia, says Mistry.