One interesting development in hedge funds is the appeal of hedge fund vehicles pegged to an index.

Called investable hedge fund indices, these vehicles resemble a fund of funds, but instead just track a hedge fund index. A fund of funds manager selects a pool of hedge funds using his own research. Investable hedge fund indices already represent several billion dollars of investment -- a drop of water in the $1 trillion hedge fund universe, but it's growing.

Lehman Brothers ( LEH) is readying its Lehman Brothers/HFN Global Hedge Fund Index for launch in the first quarter. Subindices tracking specific hedge fund strategies will later follow.

The investment bank known for its bond benchmarks partnered in the index with HedgeFund.net, a hedge fund database provider tracking more than 5,000 funds. Most of the existing investable hedge funds are a venture between a fund manager and an index or database provider.

Hedge fund investors, including pensions, love the indices, much the way that mutual fund investors love index funds and ETFs. "It should pan out the same way," says Donald Cacciapaglia, chairman and CEO of Channel Capital Group, the company that produces HedgeFund.net.

Understanding why is easy. The indices don't charge a 20% management fee like their hedge fund counterparts, and investors don't need to put in $1 million as a minimum investment. In fact, some of the indices, such as the RydexFund, which tracks the S&P Hedge Fund Index, only require a $25,000 investment. The Lehman Brothers Index is likely to follow that route, Cacciapaglia says.

Fund of funds managers who spend their time and talent tracking the best managers for their clients don't really appreciate the indices. They tend to believe that only mediocre managers enter the index platforms. What remains to be seen is whether investors will share their point of view.

Other hedge fund indices are the CSFB/Tremont Investable Hedge Fund Index, the HFRI Index and the MSCI Hedge Invest Index.

Ontario Rules

In June, a Federal Court in Philadelphia froze the assets of Paul Eustace, founder of Philadelphia Alternative Asset Management, a commodity pool and options operation accused of fraud by the Commodity Futures Trading Commission. According to press reports, last week Clark Hodgson, a receiver appointed by the court, allegedly said that Thomas Gilmartin, a Man Financial executive, had secretly traded with the Eustace's fund. Paul Lockstone, a Man spokesman, said Gilmartin had been on administrative leave for the past two weeks but he didn't say why.

The Man Group, a hedge fund giant with $44 billion under management, says in an official statement that it was "surprised and disappointed" by the actions of the receiver and that Man had already provided more than 4,200 pages of documentation.

According to a Bloomberg report Oct. 7, the Securities and Exchange Commission is undertaking an informal inquiry of Philadelphia Alternative Asset Management. Man Group said it will cooperate with the probe.

Separately, the Ontario Securities Commission and the Ontario Court of Justice filed charges against Portus Alternative Asset Management and its owner alleging that Portus engaged in a wrongful distribution of securities, misleading 26,000 Canadian investors who had invested $802 million in its funds.

Coming and Going

Daryn Soards left Marshall Wace, one of the top 10 European hedge funds, with $7 billion under management. Marshall Wace says Soards resigned last week and that he was managing the $435 million special situation portion of the $3.15 billion Eureka fund.

The firm didn't elaborate on the reasons for his departure. But Soards' return was 3% at the end of August while the overall Eureka fund posted a 22% return. One main reason, according to a hedge fund official, is that Marshall Wace recently reviewed its special situation strategy and decided to focus less on merger arbitrage. Soard was a merger arbitrage specialist.

Elsewhere, Arden Asset Management, the $10 billion fund of funds, got Natalie Birrell, the former COO of Deutsche Bank Absolute Return Strategies, to join its lineup. At Arden, she'll work closely with founder Averell Mortimer to enhance risk management, strategic planning, portfolio operations and investment processes.

Little Voice

While a good part of the hedge fund community has accepted the upcoming SEC rule on hedge fund registration as a sad but inevitable event, others continue to fight. Phil Goldstein, a hedge fund manager, sued the SEC and his case will be in a Washington, D.C., court later this year.

Observers don't seem confident about Goldstein's chances. The Managed Funds Association, the official voice of the hedge fund community, accepted the defeat last year. The group said it was disappointed by the new rule, but added that it would work with the SEC to ensure the development of the industry wouldn't be hurt.

Goldstein doesn't appear to be getting a lot of support. In a speech earlier this year, he said that, "given the climate of fear that the SEC has created, it is not surprising that no one has been willing to join us as a co-plaintiff. One hedge fund manager even urged us to discard our computer in case some thin-skinned bureaucrat might seek to confiscate our emails. For the record, our computer is still in operation."

The S&P Hedge Fund Index gained 0.97% last month -- not a huge increase, but it was the fifth consecutive month of gains.

Sound Strategies

For the first nine months of 2005, hedge funds have returned 2.42% vs. 1.39% for the S&P 500, according to Standard & Poor's. And the goal of outperforming the market is the reason the wealthy and the institutional investors pay managers the big bucks. They probably weren't too happy, then, to see that for the third quarter as a whole, the S&P 500 rose 3.15%, while the Hedge Fund Index gained 2.29%.

The S&P Event-Driven Index was up 1.08% in September, not surprising considering the gains in energy and merger activity. More interesting was the 0.52% monthly gain in the S&P Arbitrage Index due to a stabilization of the convertible arbitrage sector. It was about time. The third quarter in convertible arbitrage was the first positive quarter since last year's fourth quarter. Managers took profits in short bond positions both in Europe and the U.S. according to the S&P.

Finally, the rise of the S&P Directional/Tactical Index, which posted a 1.31% gain last month, was the best-performing strategy for September. Directional managers take open positions, either long or short, on the belief that they can predict the price of a security.

Writing Letters

On the activist front, Atticus Capital sent a letter to Phelps Dodge ( PD), the big copper producer, asking the company to undertake a multibillion-dollar stock buyback. Atticus is the company's second-largest shareholder, holding nearly 9% of the shares outstanding.

Also, Dan Loeb, the vocal CEO of Third Point, a $3.5 billion activist hedge fund, also made some noise, asking Ligand Pharmaceuticals ( LGND) to increase the trigger threshold on its poison pill to 20% from 10%. The idea is to allow the hedge fund to increase its stake. The letter complained about a lack of response from management.

Loeb has been writing a lot of letters lately. A separate missive to Ligand asked management to consider selling the company. Maybe that can explain the delayed response.

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