Investable hedge fund indices are portfolios that aim to provide the performance of hedge funds indices. They advocate a more transparent alternative to fund of hedge funds (FoFs), since they use a rules-based selection methodology that is common in the construction of more traditional financial indices.
Rules-based selection criteria are usually based on size of the funds, whether they are open to investment and certain liquidity conditions. The criteria do not necessarily provide benchmark indices that are representative of the broad hedge fund market or of a certain sector index.
Hedge fund investing holds a large number of heterogeneous products and dynamic and nontransparent investment strategies. Hedge fund indices are also calculated using databases that are polluted by several biases, including selection bias and survivorship bias.
Successful hedge funds have often not been included in investable indices, because they are usually closed for investments and do not need additional efforts to attract investors. The question whether hedge funds indices are representative benchmarks is still open.
The first investable hedge fund index was launched in 2002 by BNP Paribas in partnership with Standard & Poor’s, which granted them a license to deliver products linked to the S&P Hedge Fund Index.
BNP Paribas offered a number of derivative products, such as principal protected notes, swaps, and options linked to the hedge fund index. It was the first opportunity to have the same type of exposure as hedge funds with daily liquidity and higher level of transparency.
The index provider discloses information about the hedge funds composing the index and it has access to performance information, operational structure, and risk exposure. Index sponsors often perform ongoing due diligence and require auditors to access funds’ performance.
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| Investable Hedge Fund Indexes |
Rules-based selection criteria are usually based on size of the funds, whether they are open to investment and certain liquidity conditions. The criteria do not necessarily provide benchmark indices that are representative of the broad hedge fund market or of a certain sector index.
Hedge fund investing holds a large number of heterogeneous products and dynamic and nontransparent investment strategies. Hedge fund indices are also calculated using databases that are polluted by several biases, including selection bias and survivorship bias.
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Successful hedge funds have often not been included in investable indices, because they are usually closed for investments and do not need additional efforts to attract investors. The question whether hedge funds indices are representative benchmarks is still open.
The first investable hedge fund index was launched in 2002 by BNP Paribas in partnership with Standard & Poor’s, which granted them a license to deliver products linked to the S&P Hedge Fund Index.
BNP Paribas offered a number of derivative products, such as principal protected notes, swaps, and options linked to the hedge fund index. It was the first opportunity to have the same type of exposure as hedge funds with daily liquidity and higher level of transparency.
The index provider discloses information about the hedge funds composing the index and it has access to performance information, operational structure, and risk exposure. Index sponsors often perform ongoing due diligence and require auditors to access funds’ performance.
