What up with the Hedge Funds of Funds Index last year? Theories abound.
| Feb 15th, 2010 | Filed under: Academic Research, Performance, Analytics & Metrics, Today's Post | By: Alpha Male |
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Academics and researchers who study the hedge fund industry sometimes say that the best way to gauge the average performance of hedge funds is to look at an index of funds of funds (FoFs), not an index of hedge funds themselves. The funds of funds, the argument goes, contain many funds that do not report to any databases – and would therefore be missed by indexes of single hedge funds. In addition, an index of funds of funds is more diversified and is therefore a better representation of so-called “hedge fund beta.” More…
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[...] Why did hedge fund of funds underperform underlying hedge funds in 2009? (All About Alpha) [...]
The real answer is good old survivor bias. Clogged funds in fund of funds. No cash balances, people are puking cash out to redeemers. No new money to invest for all but a select few.
How do I know…I talk to all the folks that run the big funds of funds.
As of my understanding, the discrepancies in 2009 were not caused by the cash level that fund of funds held. If somebody looks at the hedge fund strategy performance closly, he/she may find out that the outperformed strategies were convertible bond arbitrage, emerging markets, and fixed-income arbitrage. After 2008, all these three strategies were hit pretty badly and fund of funds were trying to rush out from these strategies. As a result, fund of funds underweighted these strategies in 2009. However, the hedge fund composite index simply equally weighted on each hedge fund (strategy) which reported performance data to the database. Who would dare to imagine that convertible bond arbitrage strategy would have +50% – +100% return in a year?
[...] a portfolio of funds of funds would ultimately perform akin to a portfolio of all hedge funds. But as we noted in February, 2009 saw a major divergence between funds of funds indices and single manager indices. We wondered [...]
[...] a portfolio of funds of funds would ultimately perform akin to a portfolio of all hedge funds. But as we noted in February, 2009 saw a major divergence between funds of funds indices and single manager indices. We wondered [...]