Merrill’s Hedge-Like Indices Question Hedge Fund Fees

Apr 18 2007 | 11:25am ET

Merrill Lynch managing director Heiko Ebens went to the 2007 MARHedge Conference in San Francisco with fighting words for hedge fund managers, calling into question their very existence.

“Alpha has essentially disappeared,” Ebens told the assembled. Worse, he said, the returns hedge funds are generating can be replicated by indices, because most hedge fund returns come from the performance of the broader markets. Not coincidentally, he is the man behind those indices.

“Costs need to be justified and with active managers, there’s large overhead,” Ebens said. “We don’t have a superstar manager who we have to pay millions of dollars a year to keep.” What he does have are a pair of indices, the Merrill Lynch Factor Index and Merrill Lynch Equity Volatility Arbitrage Index, that he says have done a better job over the last three years than hedge funds tracked by three leading investable indices.

In spite of essentially asking, what are your clients paying you for?, Ebens said many hedge funds have show an interest in using his indices so as to focus their energies on finding what little alpha may be left in the market.

You could have fooled observers, however: MarketWatch described Ebens’ audience as “stonily silent,” perhaps mired in a collective existential crisis, or just considering their “millions of dollars a year” Ebens may be putting in jeopardy.

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