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Source launches ETFs tracking the Merrill Lynch Factor Model strategy

Monday, September 20, 2010
Opalesque Industry Update - Source now offers a truly passive approach to alternative investment, with the launch of two ETFs tracking the Merrill Lynch Factor Model strategy. This strategy, developed by BofA Merrill Lynch, aims to generate similar performance to funds-of-funds without investing directly in hedge funds. Instead, the Model uses a portfolio of six liquid and well-known market indices to replicate the global performance of hedge funds. The BofAML Hedge Fund Factor Source ETFs are available in US Dollars and Euro and will be listed on the London Stock Exchange and Xetra respectively. They are highly liquid, UCITS III compliant and have a 0.7% per annum management fee.

Although the performance potential of hedge funds is attractive, there are still strong deterrents for some investors: lack of liquidity, lower transparency and single manager risk. The Merrill Lynch Factor Model was designed to generate similar returns to the broad hedge fund universe from a transparent portfolio of well-known market indices. Historically, the model has achieved returns comparable to the HFRI Fund Weighted Composite Index, a recognised benchmark for the hedge fund industry.

Commenting on the launch, Source CEO Ted Hood said: “Some investors love the idea of hedge fund exposure but find the potential illiquidity problematic.. The new Source ETFs aim to provide broad, generic exposure to the hedge fund industry, without investing in individual hedge funds. These ETFs could be particularly interesting as part of a core-satellite approach, in combination with some top class individual managers, or as a liquid cash management solution for funds-of-funds.” These products are the latest additions to Source’s “alternative” range, which aims to complement Source’s existing range of exchange-traded equity and commodity products.

According to Eric Personne, co-head of Cross Asset Retail Structured Products Sales at BofA Merrill Lynch,these ETFs are a natural evolution in the alternative investment realm: “The Merrill Lynch Factor Model now has over four years of live track record, demonstrating its ability to consistently deliver cheap beta exposure to the hedge fund asset class through a liquid, transparent portfolio. Offering this through a Source ETF makes it even more accessible to investors, retaining the focus on liquidity and transparency, and with the additional benefits of an exchange-traded investment.”

Product summary:

Product Name BofAML Hedge Fund Factor Source Dollar ETF BofAML Hedge Fund Factor Source Euro ETF
Bloomberg Ticker SMLD SMLE
Fund and trading currency USD EUR
Management Fee 0.70% per annum 0.70% per annum
Listing London Stock Exchange Deutsche Börse (Xetra)
Listing Date 08/04/10 09/17/10
Index Name Merrill Lynch Factor Model Merrill Lynch Factor Model (Euro Adjusted)
Index Ticker MLEIFCTR  MLEIFCEU
Domicile Ireland Ireland

The addition of these new ETFs brings Source’s product range to 79 ETFs and ETCs across the equity and commodity segments of the market. Source now has over US$6.5 BN in assets and has seen turnover of over US$95 BN since launch in April 2009. Source is committed to delivering ETFs and ETCs with unparalled liquidity, increased transparency and reduced counterparty risk.

Source UK Services Limited is regulated by the UK Financial Services Authority.

(press release)

The Merrill Lynch Factor Model comprises a portfolio of well-known and highly liquid indices, including the S&P 500 Total Return, the Russell 2000 Total Return, MSCI EAFE Net Total Return, the MSCI Emerging Markets Free US Dollar Net Total Return, the Euro/US Dollar Spot Exchange Rate and One Month USD LIBOR. The index is rebalanced monthly. The weightings of each constituent are determined using a rules-based, discretion-free model developed by Bank of America Merrill Lynch. Weightings can be positive (long) or negative (short).

Source is a specialist provider of exchange traded products (ETPs) for European investors. It currently offers a total of 79 products including Exchange Traded Funds (ETFs), Treasury Bill Secured Exchange Traded Commodities (T-ETCs) and a physical gold ETC (P-ETC). Source’s open architecture approach is designed to enhance the performance and trading environment. By creating common standards and enhanced features, Source’s products offer investors improved liquidity, reduced credit risk and increased transparency. Corporate website: Source

- FG

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