Three important points of the Rydex SPhinX structure are noteworthy in addressing the five issues mentioned at the top of this article:

All 36 hedge fund managers have agreed to hold the fund's assets in separate accounts, not the commingled partnerships generally available to individuals. This gives Rydex transparency in seeing the positions and trading patterns of each manager, a major protection for reducing business risk. Rydex didn't obtain this benefit by virtue of awarding these managers large assets, either. For example, as of March 31, Rydex had allocated about $2.6 million to each of five equity market neutral managers. An individual investor probably couldn't command a separate account with these managers for less than $20 million-;but Rydex obtained this benefit by virtue of its fund-raising potential, combined with the desire of these managers to attract more assets to the HFI index investing concept. They clearly see it as a conduit to tap the fund-raising power of financial professionals.
Since Rydex SPhinX is an investment company that owns an interest in each manager's portfolio, it isn't required to pass through to investors all the trading gains or losses produced by sub-advisor managers, as a partnership must. Any gains or losses not distributed to Rydex are considered "unrealized" and build up inside the fund. So, the tax consequence is similar to that of a very low turnover index fund, like the S&P 500. On a $100 initial NAV, Rydex SPhinX distributed in its first six months an income dividend of 56 cents and a long-term capital gain distribution of 5.2 cents.
To provide compensation to financial professionals, Rydex SPhinX is structured as a load fund with a maximum sales charge of 3%. The sales charge can be waived for clients of Registered Investment Advisors who wish to wrap the product inside their own fee-based programs.

Rydex SPhinX has addressed five of the six major concerns that advisors may have about alternatives-;all except cost. Currently, Rydex Global Advisors has capped its advisory and administrative fees at 1.95% through a fee waiver. (Without this waiver, expenses would have been 3.36%.) But this is in addition to the hefty fees extracted by each hedge fund manager. The 9% pro forma and actual return produced by the HFI, calculated after manager-level fees, would shrink to about 7% with the Rydex fee waiver and to less than 6% without the waiver. At that point, the investment starts to look like a 10-year Treasury bond not only in terms of volatility but also return.

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Indexed Alternative Investments Are Here?And Getting Better

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