I am a technologist who has worked in the hedge fund industry since the end of 2004. Each day I come into contact with quickly advancing technology as well as interesting new ways that hedge funds are using technology in their day to day operations. As the managing director of HedgeCo Websites I also work directly with hedge fund managers who are looking to add value to their fund through their use of technology.My background and the day-to-day work I do has prompted me to start writing about hedge funds, their day to day operations, and other technology and news related stories.
I hope that my blog entries will be interesting to both investors, managers and anyone else who is interested in hedge funds.
Today’s topic: Hedge Fund Indexes
I was browsing through Wiki Answers, a collaborative Q&A site, I came stumbled on a question that asked if there are any hedge fund indexes. I decided to try out the question and answered with links to Dow Jones Hedge Fund Indexes and Credit Suisse / Tremont, which are two of the most popular hedge fund indexes.
At this point, I should probably add that I am specifically interested in hedge fund indexes because, here at HedgeCo, we are working on taking the data from our reporting funds using them to creating several benchmark indexes, a feature that will roll out in Q4 (but you didn’t hear it from me!).
Breaking down a Hedge Fund Index
Hedge funds come in many sizes and flavors, and while aggregate hedge fund indexes have their place, for all intents and purposes grouping all hedge funds together and coming up with a simple average is useless. This is where style/strategy index comes into play. Because all hedge fund managers who use a specific strategy usually follow a similar pattern of operation, once you have broken down your hedge funds into specific strategies and created your averages based on returns you can clearly see how each strategy is performing within the general hedge fund market place.
Does size matter? What is an Weighted Index?
One of the big questions that arise when discussing hedge fund indexes is how size of a fund impacts an index. Should the microcap long/short fund with $10 million AUM which has monthly a 40% gain have the same prominence as an established fund with $600 million AUM who does 3% the same month?
To combat this many hedge fund indexes are ‘weighted’ by assets under management an extremely simple example would be as follows:
microcap = $10 million + 40% = $14 million
largecap = $600 million + 3% = $618 million
Actual gain on $610 million is $22 million. This creates a 3.6% averaged weighted gain.
Other concerns
There are many other aspects that firms need to take into consideration when putting together a hedge fund index. These considerations are usually in the form of setting guidelines for which funds to include in the index, and pre-requisites for inclusion. Each index also has many proprietary metrics that they use and these factors contribute directly with the success and accuracy of the index.
This has been a fairly long blog entry, and we’re opening up the comments for this post so feel free to weigh in on how you feel on this subject.