db X-trackers, Deutsche Bank’s exchange-traded funds business, has listed an ETF giving exposure to the performance of equity long/short and equity market neutral hedge fund managers, which the firm says is designed for “financially sophisticated” investors.

The db Strategies Hedge Fund Index ETF, listed on the London Stock Exchange, is linked to the performance of 17 hedge funds from 13 alternative investment managers. This group comprises all eligible funds following equity long/short and equity market neutral strategies from Deutsche’s hedge fund platform.

The fund is a swap-based product, with Deutsche Bank's hedge fund platform taking exposure to the group of hedge funds via managed accounts and the money in the accounts then tracking what the hedge fund manager is doing. In this way, the hedge fund’s activities are tracked but the assets remain in the bank’s control.

The returns of the managed accounts collectively are expressed as an index, and db X-trackers enters a swap agreement with Deutsche Bank, whereby the bank provides the returns on the index.

The total expense ratio for the fund is 0.9 per cent per annum, while index fees, as well as management and performance fees at the underlying level apply.

In its release, the bank said explicitly the fund was for sophisticated investors. This may comfort those in the industry who have warned that ETFs are too often perceived as inactive, “index-tracking” products, when in actual fact many are not.

The proponents of ETFs say they allow low-cost access to segments of the investment universe traditionally reserved for large or institutional investors. Hedge funds are certainly one example of this. However, as with any product which has experienced similarly fast growth to ETFs – now worth an estimated $1.181 trillion globally – there are dangers of investors misunderstanding what they are buying into.

For example, Terry Smith, who late last year set up the investment house Fundsmith, recently pointed out on his weblog that investors need to consider issues such as counterparty risk when buying ETFs, and also how the performance of synthetic ETFs can diverge from that of the underlying index they track.