September 2004  Email this  Print this
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FUNDS
Riddle of the Sphinx
by David Landis Hedge funds rely on complex strategies to make money even when stocks and bonds are sinking. They are the investing equivalent of a Ferrari: sophisticated, expensive and a bit dangerous. Rydex Sphinx, a one-year-old mutual fund that invests in hedge funds, is trying to be more of a family car. It tracks the S&P Hedge Fund Index, a benchmark designed to cut through the secrecy and intrigue that have frightened away many investors. The 40 hedge funds in the index have agreed to allow independent scrutiny of their trades and asset values.
Sphinx, which has $200 million in assets, is making hedge funds available to a much wider audience. It takes just $25,000 to buy in. And although potential investors must have $1 million in net worth or $200,000 in annual income, those requirements (as well as a 3% sales charge) can be waived if shares are bought through a financial adviser.
But is Sphinx worth owning? It can provide steadier returns over time than stocks or bonds, but don't expect home runs. "It's about trying to eke out high-single-digit returns," says Jeff Joseph, managing director of Rydex Capital Partners. In a bull market, Sphinx will lag stocks, as it did last year.
There's plenty of downside as well. You can only redeem shares quarterly. And Rydex's 1.95% in annual fees are levied on top of a huge toll exacted by the managers of the underlying funds: 1% to 2.5% in annual fees plus a 15% to 25% share of any gains they generate. That's a high price to pay for the possibility of modest returns.
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