Hedge Fund using ETFs

nodoodahs · Moderator Joined: 06 May 2005 Posts: 1731 Location: TX

Link from IndexUniverse.com.

They're getting 2 and 25 for something that isn't too different from "Rotational."

Twisted Evil

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HenryTo · Posted: Thu Jun 19, 2008 2:16 pm Post subject:

They're going to have to hit up family offices and less sophisticated private wealth shops to get folks to invest in this product with a 2 and 25 fee structure. Turnover/commissions are also going to be off the charts. There is no way institutional investors would go for this.

The fundamentals data of the underlying ETFs can be purchased via MSCI and other data providers like Compustat or Thomson Financial. The "all in cost" of these, historical data, and daily updates shouldn't exceed $100,000 a year, or about $250,000 initially. The cool thing about a pure quant fund is the lack of maintenance costs going forward, vs. a fundamentally-driven fund where you have to hire at least three or four analysts to engage in fundamentals research.

nodoodahs · Moderator Joined: 06 May 2005 Posts: 1731 Location: TX

What kind of annual turnover qualifies for "off the charts?"

If they're on the same order of magnitude as the plan we've discussed, then they're looking at between 100%-1,000% turnover annually, mean about 600% annually, which doesn't strike me as much for a hedge fund. After all, a retail schlump could hit 10 average positions at 600% porfolio turnover for 60 round trips at $4 per per trade, which is $480 or less than half a percent on a $100K book. I would expect a fund with a minimum investment of $250K would be able to hit that transaction expense a lot lower. I doubt seriously that they would need daily updates on most valuation data, but I guess that depends on their window for evaluation of positions.

How much turnover and transaction expense is there at a stab art, er, stat arb fund, and is that a barrier to institutional money?

I would bet the lack of *stupid*overcomplication* would be the main barrier to institutional investment in the fund. [edit to add: Oh yeah, and the 2/25. I bet you could sell this to institutions for 1/10 all day long, probably have a sweet spot somewhere north of that but south of 2/20.]

It'll be interesting to see how much money they attract, and from whom, in the next year or so.
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He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.