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Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

TRACKING THE NUMBERS: Investors Exit Vehicles to Limit Hedge-Fund Risk

  • Summary: During 2003 and 2004, investors plowed about $12 billion into hedge-fund index funds (or 'investable index funds'), believing these would be a good way to capture the broader returns of that booming industry in a low-risk manner. Yet many such funds are not keeping up with the indexes they track. For example, the MSCI Hedge Invest Index, the investable index fund that tracks the MSCI Hedge Fund Composite Index is up 2.9% (year-to-date), while the index itself is up 5.1% during the same period. Reasons for the poorer performance of these funds: high fees, plus the fact that investable index funds generally do not close their funds to new investors, while strong-performing hedge funds often do not accept new investors because they want to keep their funding to a specific level (to invest efficiently). The end result? Investors are starting to pull money from investable index funds.
  • Comment on related stocks/ETFs: Richard Kang discusses the question of whether or not hedge funds are acting like index trackers. See also this two-part discussion (1, 2) on building your own hedge fund.