Anyone Can Be a Millionaire With These Funds

NEW YORK (TheStreet) -- For years, financial engineers have tried to develop index funds that track hedge funds.

The appeal of indexing is clear. While individual hedge funds can blow up, many have delivered impressive gains. During the 22 years ending in 2008, the average hedge fund returned 14% annually, outperforming the S&P 500 Index by 8 percentage points, according to Hennessee Group. And hedge funds can diversify portfolios. Because they can sell short, betting on declines, the funds often outperform mutual funds during downturns.

Designing an index fund has proved difficult because of the peculiarities of the hedge fund industry. To track the S&P 500, you simply buy shares in the 500 stocks. But it isn't possible to purchase a stake in each of the 9,000 hedge funds that exist. For starters, many are closed to new investors or require steep minimum initial investments. That's why hedge fund investors are usually millionaires. In addition, the lineup of funds constantly changes as new hedge funds open and others shut.

Although no one has succeeded in precisely tracking the entire universe of hedge funds, several companies have recently introduced mutual funds that aim to provide broad exposure. So far, the funds have proved promising, limiting losses in 2008 and delivering positive results during this year's rally.

One of the newcomers is Goldman Sachs Absolute Return Tracker Fund(GARTX Quote). During the fourth quarter of 2008, the fund lost 7% of its value, outdoing the S&P 500 by 14 percentage points, according to Morningstar.

To manage the fund, Goldman starts by studying the returns of a group of 4,000 hedge funds. Then the company uses futures and other securities to build a portfolio that should closely replicate the group's results. The fund recently had 22% of assets in equities and 7% in commodities. Other holdings included cash and short positions in bonds. "The fund provides exposure to a composite of the hedge fund industry," says Glen Casey, a managing director at Goldman Sachs Asset Management.