Invesdex Explains Futures-Based Alternative Investment Contracts

Investors Offshore, London

14 February 2003

Hamilton, Bermuda-based Invesdex Ltd (www.invesdex.com) has announced the launch of MarketPlus Separately Managed Contracts (SMCs), a new alternative investment vehicle for investors seeking increased liquidity and transparency. MarketPlus is Invesdex's flagship online OTC investment instrument that previously was targeted to active, self-directed investors; MarketPlus SMCs now broaden the appeal of MarketPlus by catering to manager-picking hedge fund investors.

MarketPlus contracts are entered into with Invesdex Capital and are linked to the performance of one or more futures contracts, including equity and debt indices, currencies, commodities, and a money market index. With SMCs, instead of using MarketPlus as a do-it-yourself platform, investors now can allocate funds among a number of professionally managed MarketPlus contracts. Invesdex helps the investor select that appropriate managers and styles from Invesdex's database of absolute-return strategy managers, but the investor has the final say in the ultimate composition of the manager group, or cohort.

MarketPlus says that SMCs enable investors to build a portfolio that mimics a fund of funds, but (1) is custom-suited to their specific needs; (2) costs less; (3) has daily liquidity and transparency (mitigating manager and structure risk); and (4) might receive favourable tax treatment. (In certain jurisdictions, MarketPlus is deemed to be a contract for difference; in which case, depending upon the citizenship and residence of the investor, gains are treated as capital gains and only recognised for tax purposes upon redemption.)

Valere Costello, President and CEO of Invesdex, emphasises that SMCs are not a fund of funds, but simulate a fund of funds. "This is similar in concept to separately managed accounts in that the contracts are owned by the investor and the trading responsibilities have been contracted to the managers," said Costello. "But you have the significant advantage that SMCs are limited liability." Once a manager group is selected, the investor can monitor, on an intra-day basis, the performance of their SMCs online. They also have the ability to make new investments or redemptions daily, and even change their mix of managers.

SMCs already are finding a receptive niche in the community of hedge fund investors. In February, Invesdex launched a five-manager cohort for an institutional investor, and another cohort -- expected to consist of six to eight managers - is slated for early March. Several more cohorts are in the works.

Invesdex's database of hedge fund managers has been growing and currently numbers 20, although Invesdex does not intend to grow the database much beyond 40 or 50 in total. "We already have achieved a critical mass of managers," said Costello. "So our emphasis is on quality, not quantity. We only want to forge relationships with top-performing managers that have demonstrated persistence in their ability to generate absolute returns with relatively low volatility." Manager cohorts generally will target net absolute returns of at least 15% per annum with lower-than-equity-market volatility; individual investor results will vary, however, depending upon risk tolerances and cohort composition.

SMCs are not for everyone and they do have certain limitations. To start, they only are available to non-US investors, and the minimum investment is US$2 million. The high minimum is necessary in order to ensure sufficient diversification across managers and strategies, while meeting the underlying minimum requirements of the managers. Further, the platform only provides for futures-linked investment strategies, so not all hedge fund strategies can be duplicated.

Invesdex management also revealed that this announcement would be followed by several more functional improvements to MarketPlus over the coming months, including the addition of non-U.S. exchange traded assets and after hours trading. "We are pleased with the success of MarketPlus to date, but the best is yet to come," said Costello. "SMCs are taking us to that next level."

Valere Costello has an interesting explanation of the background to the development of such new alternative 'alternative investments':

'With an estimated US$600 billion currently under management, the hedge fund industry has come a long way since 1949, when Alfred Winslow Jones formed the first such fund based on what he called an 'absolute return' strategy. Allocations to hedge funds have recorded dramatic increases over the last few years driven by the free fall in the equity markets and increased interest from institutions, but investor wariness persists fuelled by highly publicised fund collapses like LTCM, Beacon Hill, Manhattan, and most recently, Eifuku.

'The industry has taken a number of steps to address the concerns of cautious investors. One such development was the introduction of funds of hedge funds as a means of diversifying the risk. But these 'funds of funds' still lack the transparency many investors seek, and the extra layer of fees means they cost the investor more.

''Separately managed accounts' have been around since the late 1970s and are an increasingly popular choice because of the liquidity, transparency, and cost savings advantages. But they do have their shortcomings. Many hedge fund managers eschew separately managed accounts, so achieving the diversification can be onerous; further, accounts that provide for the use of leverage or short-selling strategies generally do not offer limited liability.

'Some of the large banks are trying to address the fundamental issues of transparency and manager risk. Wells Fargo, for example, recently launched two new fund vehicles that combine features of a fund of funds with those of separately managed accounts - quasi 'funds of trust accounts'. Wells Fargo teamed with HFR Asset Management to select managers that manage fund assets in separate accounts held within a special-purpose trust vehicle. Both funds invest in 5-10 strategies and 10-20 managers, with one targeting equity-like returns with lower volatility, and the other better-than-equity returns coupled with equity-like volatility. Wells Fargo monitors the performance of the managers in the underlying accounts, solving one of the hedge fund industry's major concerns, that of transparency - the ability to determine the actual daily performance of the portfolio.'

Invesdex's Market Plus SMC's says Costello, are a response to these market trends towards increased liquidity and transparency. 'Using MarketPlus,' he says, 'is similar to direct futures investing, but easier and less risky due to decreased leverage (maximum 3:1), and the guarantee of limited liability - MarketPlus contracts are non-recourse to the investor.'

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