Within these categories there is scope for very disparate funds to be included. For example, the equity hedge category includes "a wide variety of investment processes, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios."

In other words, you don't know what you're going to get, except that, as it's a hedge fund, the manager is supposed to be trying to generate absolute returns in all market conditions. The db x-trackers fund factsheet gives back-tested returns from the hedge fund index from 2003-2008, with the five years from 2003-2007 showing a return averaging around 10% a year, and a fall of 9.19% in 2008. 

Within each of the five sub-categories a minimum of five fund managers will be represented, with the percentage allocation to each hedge fund within a category being rebalanced to an equal weighting each quarter.

The db x-trackers hedge fund ETF fund fact sheet, available to download from the firm's website, lists 32 initial hedge fund advisors across the five categories. Their funds' returns will provide the raw material for the index returns. Beyond the names of the firms involved, there are no specific details of how the advisors will invest, although Deutsche Bank points out that there is generally a good deal of publicly-available information on the managers and their policies.  When asked about the selection process for the funds, the bank said that it is looking for "well-known managers running liquid hedge fund strategies". It's worth noting the difference here with a discretionary fund of funds structure, where the fund selector would be looking, after conducting a due diligence process, to select the best managers available.

The ETF will charge an annual management fee of 0.90% per annum, putting it pretty much at the top of the range as far as tracker fund fees go. But then hedge funds have never been associated with cheapness, and the ETF is better value, in headline terms, than a traditional fund of hedge funds structure, where the fund of funds manager would typically add an extra 1%, plus a performance fee of 10%, over and above the underlying fund fees.

But it's important to be aware that the hedge fund fees haven't disappeared in the ETF, either. The hedge funds will charge their own, typically performance-related fees (which have historically run at "two and twenty" - 2% flat, plus a 20% performance fee) to the Jersey funds which constitute the managed account.  In other words both the index and the ETF will be tracking the post-fee returns of the hedge funds.  This means that, by the time you get down to the underlying stocks and bonds within the hedge fund ETF, you could easily be looking at a total annual fee approaching 3% (before even mentioning the performance kicker).

Ultimately, how the "hybrid" hedge fund ETF fares is likely to depend on which investor base you look at. Those (largely institutional) investors with an allocation available to make to "alternatives" (a catch-all term encompassing nontraditional asset classes) should be attracted to the new fund, particularly to its enhanced trading liquidity and UCITS-compliant status. The more cost-conscious amongst ETF investors will probably need some convincing that it's worth paying hedge fund fees, plus a charge on top, for what is quite a complicated structure.

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