Benchmark Plus offers index fund with novel fee structure
Fund of hedge funds manager Benchmark Plus has launched a long/short equity tracker benchmark Plus HFRI Equity Hedge TRAX with an unusual ‘fee reserve’ and clawback structure.
The Benchmark Plus HFRI Equity Hedge TRAX fund seeks to replicate the performance of the HFRI Equity Hedge (Total) index, which tracks the returns of around 1,400 long/short equity managers. Launched by fund of hedge funds (FoHF) manager Benchmark Plus, the long/short equity tracker has an unusual ‘fee reserve’ and clawback structure.
The Hedge TRAX fund invests in the Benchmark Plus Long/Short Equity Partners FoHF, which has exposure to around 25 underlying long/short equity managers.
Benchmark Plus employs an overlay of derivatives to neutralise or accentuate the beta and factor exposures of this portfolio to match the return drivers of the index, while preserving the alpha component of the underlying managers’ returns.
“The aim is to capture not only the betas and factors that drive the returns of the index but also the alpha component of those returns. That’s the part that index funds and replicators tend to miss,” says Michael Mikytuck, director of business development at Benchmark Plus.
He estimates the HFRI Equity Hedge index has delivered alpha returns of around 2% annually over the past five to seven years after accounting for all beta and factor exposures.
Hedge fund replicators that attempt to recreate the return drivers of an index with derivatives and exchange traded funds (ETFs) are unable to capture this alpha, which is why they often trail the index, says Mikytuck.
Benchmark Plus has been running the Hedge TRAX fund with internal capital since January 2011 and has achieved a 99%-plus correlation to the index over this time.
The biggest draw of the Hedge TRAX fund may be its novel fee structure. Benchmark Plus believes the 25 managers on its portfolio will on average generate more alpha than the index. “If we can match the betas one for one and skew the alpha a little higher, we can cover our costs with the excess alpha and provide investors with the total return of HFRI Equity Hedge index net of fees,” says Mikytuck.