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Hedge funds and funds of hedge funds (FoHF) have become part of the mainstream and their diversification benefits are widely acknowledged but high fees and comparatively poor liquidity still constitute a barrier for many investors. This reluctance is fuelling the growth of various new hedge fund alternatives.

The first-generation of hedge fund alternatives were investable indices, which aim to offer investors low cost access to a diversified portfolio of hedge funds. The basic concept is very similar to an exchange-traded fund in that these products track the performance of a diversified pool of hedge funds to offer cheap, transparent and passive exposure to the asset class. While the concept of investable hedge fund indices makes sense, it is difficult to implement in reality. The main challenges of conventional investable indices are the lack of representativeness and the relatively small cost advantage as investable index providers still have to perform due diligence in order to pick funds. A more modern approach is the development of next generation eligible financial indices sponsored by hedge fund providers. These indices allow investors to gain broad exposure to hedge funds in a mutual fund format.

A more recent concept tries to sidestep investing in single hedge funds altogether: Alternative beta, also called hedge fund beta or hedge fund replication. Alternative beta aims to produce hedge fund like returns without actually investing in hed......................

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