The objective of the ETF-MS Hedge Fund of Funds Model is to build a diversified portfolio of liquid alternative fund (primarily mutual funds) that provide a lower cost and a more liquid way to access exposure to risk-managed (hedge fund) strategies.  Hedge Funds of Funds have generally been illiquid and have been available to institutions and accredited investors at a 3% management fee and 30% incentive fee cost structure.  Due to the proliferation of the liquid alternative strategies offered in 1940 Act funds (mutual funds registered under the Investment Company Act of 1940), it is now possible to build a broadly diversified portfolio of hedge funds that are not only liquid, but available at a much lower cost structure than the “3 & 30” cost structure.  The Hedge Fund of Funds Model seeks to produce returns that have a higher correlation to broad hedge fund benchmarks such as the HFRX Hedge Fund Index at a substantially lower cost than what an investor would have to pay under a traditional hedge fund partnership structure.

The model is invested across four main segments of the hedge funds universe: 1) Multi-strategy funds 2) Arbitrage funds 3) Event-Driven funds and 4) Directional funds. Examples of strategies include Fixed Income Arbitrage, Convertible Bond Arbitrage, Merger Arbitrage, Capital Structure ArbitrageEquity Long Short, Managed Futures, Momentum, etc.

Hedge Fund of Funds

Hedge Fund of Funds Model Cost Summary

    • The net internal operating costs of the funds within the Hedge Fund of Funds Model is 1.42%*.
    • This compares very favorably to the Morningstar Category Average of Multi-Alternative Funds 2.07% (Source: Morningstar Direct)
    • Hedge Fund of Funds Model helps reduce overall cost of investing by 29% when compared to active money manager costs.

Model Benefits When Compared to Traditional Hedge Fund of Funds

    • Full liquidity on a daily basis (no minimum lockup period)
    • 1099 reporting (no K-1s)
    • Improved Transparency with respect to underlying holdings

*sourced from morningstar as of 3/31/2014.  Cost analysis based on holdings at target allocations as of 3/31/2014.  Holdings subject to change. Individual account cost may vary.