It is not a flattering trend. To money managers, that is. For some time now, institutions have been coming around to the view that paying for active fund management is a waste of money. Unhappily, the evidence tends to support this conclusion.

Hence, the rise of index products. The scary thing for money managers, such as those in the mutual fund industry, is that individuals are wising up, too. The explosion in exchange-traded funds (ETFs) is testament to that. If you want to perform as well as the S&P, buy Spiders – easily and cheaply.

For institutions, this bias is beginning to infect their approach to buying hedge funds. No pension or endowment manager wants to be the only guy in the locker room who can’t talk hedge funds.

But in truth, gearing up to jump into alternatives takes a great deal of work and preparation. It is very difficult to get a broad sense of what is available, who the main players are, what the benchmark should be, and so on.

In any case, a new entrant to investing in hedge funds either has to tack on a fair amount of staff or hire consultants who presumably can act as tour guide. An alternative is placing money with a fund of funds, which may help achieve diversification and entree to some of the best funds.

Or they can jump aboard one of the investable index products now on the market.

This column has reviewed the lamentable inability of the investable products to track the industry overall. Performance of most investable indices has trailed behind the corresponding index, in some cases by a wide margin.

The best of the lot last year was a vehicle called the Van International Investable Index (VIII). Launched in May, the VIII was ahead 4.3% through year-end. For the same time period, similar products published by CSFB/Tremont and MSCI were only ahead 3.58% and 2.14%, respectively.

Why is this significant? Because the Van International Index has produced a compounded return over the last 17 years (since 1988) of 14.2% – better than the 12.4% of the S&P 500, and 6.6% of the MSCI World Equity Index. Also, the standard deviation has been only 10.4%, considerably less than the 15.2% of the S&P, and 16.1% of the MSCI.

That’s a lot of numbers. The bottom line is that if you had created a product that mimicked the Van International Index, you would have done very well indeed. In fact, in 2004, the Van Index was up 4.4% – just a tad above the investable product.

There are two questions – will the Van product continue to outperform? And will the investable product continue to track so closely?

The Van index was created to follow hundreds of offshore funds. The Van Companies, headquartered in Nashville, Tenn., are registered investment advisers who provide hedge-fund research and related investment products (including fund of funds) to clients.

John Van, the company’s CFO, is confident that investable indices are here to stay. At the end of last year, the two-year-old vehicle had attracted more than $10 billion industrywide, even as suppliers are rushing to market more, and presumably better, products.

He also considers that the Van Investable Iindex has been crafted with some significant advantages that should allow it continued outperformance.

Unlike its competitors, the Van product has tried to minimize the constraints on the underlying managers in the index so as to allow for the broadest possible participation. Such limitations often involve requiring greater-than-normal liquidity, minimum size, or length of track record.

Another difference is that Van does not allow managed accounts for replication purposes. The investable index funds must be invested in the funds. In our view, this is crucial to the minute disparity between the index and its investable counterpart.

This product is being marketed primarily to institutional investors, and has sold especially well to Europeans.

Van will ultimately turn its attention to U.S. investors, and may face some hurdles in creating a similarly successful product. In the meantime, in their selected niche, they appear to be ahead of the game.

Ms. Peek is a former managing director of Wertheim Schroder, now part of Citigroup.