Wow. Not to soon after I write about the potential for hedge fund investing to morph into an exchange traded instrument, the Financial Times now reports that Dow Jones Indices is working on investable indices that are engineered to mimic the performance attributes of various hedge fund strategies.For those of you who follow hedge fund investing, you have to wonder if these new “replication strategies” will not only aim for return and volatility targets but also attempt to provide some control over skew and kurtosis.

These new “investable indices” sound a lot like hedge fund index investing, which has been around for quite a few years with limited success. The only difference now is that instead of having various underlying hedge fund managers (and the costs of managing them in addition to their inherent fees), we have a strategy based on implementation using direct investment into capital markets including derivatives.

Theoretically, this should lower costs dramatically. However, if new products based on these strategies actually do provide the expected performance results (high alpha, low beta) then I have a funny feeling that the fee structure will not be too far from existing fund-of-hedge fund products currently in the marketplace. We’ll see.

Professor Harry Kat, of London’s Cass Business School, has written some commentary on this subject. The concept of replicating hedge fund strategies using derivatives is one of Kat’s areas of specialty. I highly recommend his papers which, although not as technical as most academic papers are still, well, technical.