Credit Suisse Launches Hedge Fund ETN (CSLS)

by on February 22, 2010 | ETFs Mentioned:

Credit Suisse, one of the world’s largest financial services providers, announced Monday the launch of the Credit Suisse Long/Short Liquid Index (Net) ETN (CSLS), a product designed to correlate to the performance of the Credit Suisse Tremont Long/Short Equity Hedge Fund Index. But the new ETN achieves hedge fund-like exposure in a unique manner. The index to which CSLS is actually linked, the Credit Suisse Long/Short Liquid Index, is designed to reflect the return of a basket of 18 liquid, investable market factors. ┬áThese factors are then selected and weighted monthly in accordance with an algorithm that aims to track the performance of the Credit Suisse/Tremont Long/Short Equity Hedge Fund Index.

“Credit Suisse/Tremont was a pioneer in the measurement of alternative beta over a decade ago and we are now leveraging this expertise to meet the growing demand for liquid, cost-efficient, alternative products,” said Michael G. Clark, head of Structured Retail Products in a press release. “We look forward to launching additional ETNs on other alternative strategies in the near future.”

The composition of the underlying index has changed considerably over time based on the quantitative analysis and rules-based methodology. In 2009, the index consisted of long positions in the Russell 2000 Growth, NASDAQ 100, and MSCI EAFE, among others, while maintaining short exposure to the Russell 2000 and Russell 2000 Value Indexes. By establishing long and short positions in a variety of widely-followed asset classes, the index has historically come very close to replicating the performance of hedge fund benchmarks.

Hedge Fund ETFs See Popularity Surge

The rise of the ETF industry has brought “exotic” asset classes and investment strategies once available only to large institutional investors and the super-rich within reach of millions. CSLS joins a number of products from IndexIQ, the pioneer in the hedge fund ETF space, that have launched over the last year. In addition to QAI, which attempts to replicate the risk-adjusted return characteristics of hedge funds using various hedge fund investment styles, IndexIQ offers funds focusing on macro investment strategies (MCRO), and merger arbitrage (MNA).

While investors were originally skeptical of the ability of these products to actually replicate returns delivered by hedge funds, the have begun to gain significant traction. QAI now has more $85 million in assets and average daily volumes above 35 million shares. Hedge fund replication products offer some significant advantages to traditional hedge funds, including lower fees, increased transparency, and much greater liquidity (see Will Hedge Fund ETFs Replace Hedge Funds for a more in-depth comparison).

Unlike the hedge fund products from IndexIQ, Credit Suisse’s CSLS is structured as an exchange-traded note (ETN). As such, the payment of any amounts due is subject to the credit risk of Credit Suisse. CSLS will charge an expense ratio of 0.45%, a relatively competitive fee structure. IndexIQ’s hedge fund products charge 0.75%, in addition to any acquired fund fees.

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Disclosure: No positions at time of writing.