Hedge Fund Indices from an Academic Perspective: Reconciling Investability and Representativity

Following a growing concern among investors about the quality of hedge fund index return data, and given the lack of capacity and transparency specific to that industry, this paper questions from an academic perspective whether it is feasible or not to design hedge fund benchmarks satisfying all defining properties for a good index.

Author(s) :

Lionel Martellini

Professor of Finance, Edhec Graduate School of Business,Scientific Director, Edhec Risk and Asset Management Research Centre

Mathieu Vaissie

Research Engineer, Edhec Risk and Asset Management Research Centre

Felix Goltz

Research Engineer, Edhec Risk and Asset Management Research Centre

In particular, in an attempt to test whether achieving investability necessarily comes at the cost of representativity, as sometimes claimed by hedge fund index providers, we borrow from the asset pricing literature the concept of factor replicating portfolios and apply it to the benchmarking of hedge fund style returns. Our results suggest that it is actually possible to construct representative indices based on a limited number of funds, except perhaps in the case of Equity Market Neutral strategies, provided that i) these funds are suitably selected and ii) an optimal portfolio is designed with the objective of replicating the common trend in hedge fund returns for a given strategy. A wide range of tests are performed that show that high correlation of the factor replicating portfolios with the common factor of returns for each strategy is remarkably robustness with respect to modifying the number of funds in the replicating portfolio, choosing less correlated funds, changing the frequency of rebalancing, using a static selection of funds or imposing constraints on weights.
Hedge Fund Indices from an Academic Perspective: Reconciling Investability and R...
(-1.00 B)
Type : Working paper
Date : le 14/09/2004
Extra information : For more information, please contact Joanne Finlay, EDHEC Research and Development Department [ joanne.finlay@edhec.edu ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Research Cluster : Finance

See Also

[Insider View] Student Experience - Discovering Berlin entrepreneurial ecosystem
- 15-03-2018
Floriane de Malestroit (third on the right), EDHEC MSc in Entrepreneurship &...
- 14-03-2018
Joëlle Vanhamme, Professor of Marketing at EDHEC Business School, has been a member of...
- 09-03-2018
The MSc in Data Analytics & Digital Business programme is proud to announce its partnership with Ecole 42. Co-founded by Xavier Niel, Ecole 42 is a novel and disruptive...
EDHEC Global MBA ranked 40th best MBA for women by the Financial Times
- 07-03-2018
This result reflects EDHEC’s enduring determination to support women in their career...