Study Disputes Value Of Passive Hedge Fund Investing

Investors Offshore, New York

01 August 2002

The Research Team at Carlyle Asset Management Group (CAMG) yesterday released a study that challenges the value of investing in a passive index of hedge funds. The paper, authored by CAMG scholar Dr. Jimmy Liew, will be published in early 2003 in the Journal of Portfolio Management.

Afsaneh Mashayekhi Beschloss, CAMG CEO and Chief Investment Officer, said, "Index investing is of particular importance as investors consider hedge fund investment vehicles, and this paper sheds considerable light on this issue. We believe that innovative research is an integral part of a quality asset management group."

The paper, "Hedge Fund Index Investing Examined," finds that at first glance, investing in a hedge fund index appears to be an inexpensive way for investors to gain hedge fund exposure. However, Dr. Liew contends that passive index investing exposes investors to the risk of investing with managers with little or no skill. In fact, the study finds that after controlling for the market and liquidity issues, the majority of hedge fund managers do not exhibit skill. Moreover, the study finds that index investing does not provide diversification benefits at the very times they are needed the most, namely periods of market dislocation -- a serious drawback to investors who seek these investments because they appear to be uncorrelated to traditional markets. Finally, the paper argues that an actively managed fund of hedge funds that can effectively identify managers with skill can outperform a passive index, even after accounting for the additional layer of fees.

Established in late 2001, Carlyle Asset Management Group was formed to explore market opportunities in the developing alternative investment world, notably hedge funds, secondary private equity and fund of funds. Ms. Mashayekhi Beschloss is the former Treasurer and Chief Investment Officer of The World Bank, where she was responsible for $65 billion in assets, $160 billion in derivative and structured products, and $30 billion in funding strategies. CAMG has offices in Washington, DC and New York, NY.

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