Source, a provider of exchange traded products, has launched two new exchange-traded funds tracking the Merrill Lynch Factor Model strategy, aiming to offer a passive approach to alternative investment.

The strategy, developed by Bank of America Merrill Lynch aims to generate similar performances 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 euros; they will be listed on the London Stock Exchange and Xetra. The funds will be Ireland-domiciled, UCITS-III compliant and carry a 0.7 per cent per annum management fee.

“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,” said Source's chief executive, Ted Hood.  

The demand for liquid exposure to hedge fund-type investments has seen a profusion of absolute return products, or "hedge fund-lite" vehicles in the form of UCITS III funds.