IndexIQ, one of the pioneers in the hedge fund replication product space, will soon enter the European and Asian markets through a deal with Natixis, the France-based bank. Natixis is the 15^th largest asset manager in the world, with over $900 billion in assets, and has a large structured products platform for its global markets.

The bank is licensing a customized hedge fund replication product from IndexIQ as its first foray into distribution of hedge fund replication strategies. The bank already has an established structured products group, and the hedge fund replication strategy, structured as a note, will leverage this existing platform.

Adam Patti, CEO of IndexIQ, said, "We are U.S.-centric in terms of distribution, but we were looking for a partner in Europe with strong distribution and a powerful brand name, and we were fortunate to find Natixis."

While IndexIQ will continue to concentrate most of its distribution effort in the U.S., it is looking for a select number of global partners to complement Natixis. "This product has been customized exclusively for Natixis, and will remain exclusive, but we are looking to build on this first relationship outside the U.S.," Patti said.  

The trends that make the hedge fund replication strategies attractive to overseas investors are in line with the trends that have attracted attention from U.S. investors. Patti said it is the search for low-volatility alternative beta that can be best captured through hedge fund replication strategies.

The Infamous '2 And 20' 

What's more, the hefty fees common in the hedge fund arena, the ubiquitous "2 and 20 for performance," are not easy for investors to stomach during a market in which many hedge fund managers are getting pummeled.

"Hedge funds are supposed to hedge the market, and yet now guys are just out there picking stocks and charging '2 and 20,' but not providing the expected value," Patti said.

Very few of those funds are actually providing alpha, so the use of hedge funds to provide low-volatility alternative beta at a much lower expense level is more and more attractive to investors.

The flagship product in the Natixis agreement is a structured note that includes the implementation of more conservative volatility measures than IndexIQ has offered in the U.S.

Hedge fund indexes have taken a beating of late, with composite hedge fund manager indexes in negative territory not seen since the indexes were created in the early 1990s. Patti said the widespread performance shortfalls among individual hedge fund managers are helpful to the timing of new replication strategy launches.

"The key for us is that we are replicating a noninvestable universe, as opposed to a universe of investable hedge funds," Patti said. He explained that many individual hedge fund managers don't have staying power, have made bad bets and are now being squeezed by lack of liquidity and the credit crises, and so overall, the industry returns are down.

He noted that IndexIQ uses liquid securities. "The markets are in upheaval, there is significant volatility and uncertainty, and this is where hedge funds should be shining. But why would you pay a manager 2 and 20 to ride out the storm when they aren't doing that? Hedge fund replication allows investors to be diversified in safe, inexpensive and full liquid and transparent investments," Patti said.

With these first products now hitting the market, investors will begin to be able to evaluate a live track record to see how these new hedge fund replications products perform in real time.