Merrill Lynch Creates "Equity Volatility Arbitrage Index" to Replicate Hedge Fund Strategy.

NEW YORK -- Merrill Lynch (NYSE:MER) today introduced "The Merrill Lynch Equity Volatility Arbitrage Index," a tracking index, which is quoted intraday on Bloomberg under the symbol MLHFEV1.

The Merrill Lynch Equity Volatility Arbitrage Index seeks to replicate the returns of an S&P 500 volatility arbitrage strategy employed by many actively managed hedge funds. The Index uses rules to govern the investment process and eliminates the fees associated with active management.

Simulated back testing of the Merrill Lynch Equity Volatility Arbitrage Index has outperformed most major global broad-based investable and non-investable hedge fund benchmark indices. Moreover, the strategy returns were negative in only three quarters over the last 18 years. The source of this strong performance is the high demand for S&P 500 index volatility relative to supply, a structural imbalance that has persisted for decades.

"Using rules to avoid the cost of active hedge fund management is the same principle that helped passive index funds (such as ETFs) gain market share from actively managed mutual funds," said Heiko Ebens, head of the Americas Equity Derivatives Research team at Merrill Lynch. "Additional distinct benefits of this style of investing are complete transparency, and the elimination of both style drift and manager risk."

This is the first in a series of hedge fund replication indices Merrill Lynch Research plans to launch that mechanically implement strategies commonly employed by actively managed hedge funds. Merrill Lynch's Synthetic Hedge Fund Research has identified arbitrage opportunities in other asset classes that lend themselves to a rules-based approach.

"We find that some mechanically executed arbitrage strategies historically have outperformed active hedge fund benchmarks, not only because of the reduction in fees, but also due to the quality of the investment strategy," said Heiko Ebens.

Merrill Lynch research analysts first noted in the October 2006 report, "Replicating hedge fund returns, New alternatives in alternative investing," that as the hedge fund industry matures, and more active managers share and compete for available returns, justifying paying higher fees for active management may be increasingly difficult if similar strategies can be mechanically implemented at lower cost.

The October 2006 report outlined two methods for creating synthetic hedge funds: (1) replicate hedge fund benchmarks with a dynamic portfolio of liquid assets, and (2) execute strategies similar to those employed by active hedge funds. The first method has been the subject of extensive academic research and has been recently implemented by industry participants. The second method, the basis for the Merrill Lynch Equity Volatility Arbitrage Index, does not aim to track hedge fund returns, but rather invests in the same assets.

Additional information on Merrill Lynch hedge fund replication indices is on the Bloomberg page MLHF where all indices will be posted.

Merrill Lynch Global Securities Research & Economics Group has consistently achieved high rankings for its equity and fixed income research in numerous regional and global investor surveys, such as Bloomberg magazine, Institutional Investor, The Wall Street Journal, LatinFinance, Asiamoney, Euromoney, Extel and Reuters.

Merrill Lynch is one of the world's leading wealth management, capital markets and advisory companies, with offices in 37 countries and territories and total client assets of approximately $1.6 trillion. As an investment bank, it is a leading global trader and underwriter of securities and derivatives across a broad range of asset classes and serves as a strategic advisor to corporations, governments, institutions and individuals worldwide. Merrill Lynch owns approximately half of BlackRock, one of the world's largest publicly traded investment management companies, with more than $1 trillion in assets under management. For more information on Merrill Lynch, please visit www.ml.com.