Hedge Fund Indexes Learn to Walk Upright: Introducing the Hedge Fund Barometer
| Jun 30th, 2011 | Filed under: Guest Posts, Today's Post | By: Guest |
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By Jim Liew
The hedge fund industry has evolved from a cagey, secretive, cottage-industry to something that is much more transparent and institutional investor friendly. Gone are the days when mere “access” to hedge funds was considered a competitive advantage. Rather, we are now seeing our industry actively pursuing institutional investors and even creating products tailored for them.
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Excellent Article Jim. I cant wait to see such ‘representative’ indices. There is certainly a gap in the market as the current data providers are way behind the curve on this. Only two of the 10 or so existing Index providers ( Dow Jones Tremont and RBC Hedge ) produce capitalisation weighted Indices for hedge funds. The managed account platforms ( HFR, db-x, Lyxor etc ) are somewhat better but all retain the cagey and secretive mindset you refer to in your article. Currently none of the above provide public access to their Indices in such a format ( constituent fund level time series of returns and weights ) that satisfies the AIMR Benchmark guidelines of replicability. Dow Jones Tremont and RBC Hedge are the only two that provide weights through time at all and that only at sector or strategy level. Even if you subscribe to three or more databases of HF returns incl ( TASS, Eurekahedge, HFN, HFR, HFI etc. ) you will not be able to easily replicate the time series of any of the so called ‘investable’ indices even for those few providers ( Dow Jones Tremont ) that do provide the names of constituent funds. Of the managed account platforms only HFR and Lyxor provide constituent names and return time series but neither provide index weights and all information is only available to a limited audience.
AIMR Guidelines for Benchmarks
(AIMR Benchmarks and Performance Attribution Subcommittee Report 1998 and AIMR US)
Representative
Investable
Constructed in a disciplined manner
Formulated from publicly available information
Acceptable by the manager as the neutral position
Unambiguous
Measurable
Appropriate
Specified in Advance
Replicable
You forgot to mention the work of Andrew Lo at MIT and his company which has been in the hedge fund, factor based area for a while. While I agree with your premise on transparency for smaller startup funds, name brand funds such as SAC will continue to be structured anyway they want until they have performance problems. Start up funds will use managed account platforms to prove themselves and then likely move to a traditional structure. The irony here is that as a fund gets bigger and potentially more risky, there will be less transparency.
Great article!
Thanks again for all your comments. Please keep them flowing. First off, I’m a big fan of Andrew Lo… so, to clarify a bit the barometers are not like his “factor-based” hedge fund replication product — ASG Global Alternatives Fund. The barometers are more like his ASG Managed Futures Strategy Fund products etc., however if you look very closely at the fees, they are way too high in my professional opinion…please see the front-load fee. If you start out paying 5.75% front-load fee, how much can you make net of fees? and I haven’t even included the management fee. Also, I envision real-time pricing and risk/allocation flexibility across the barometers. Note that, unfortunately, this fee structure is very common for such products in our industry today.
Jim,
Thank you for an excellent article.
When discussing prior attempts at replication with low fee structures, You wrote: ” Unfortunately, both schools did not succeed because the product was too simple and priced at such low fees that it wasn’t interesting to create or sell.”
While I lack your expertise, I have long agreed with the view that dramatically reduced incentive structures may be self defeating (because they deprive the creators and marketers of such strategies with competitive compensation for their efforts).
If so, then perhaps Andrew Lo’s 5.75% front load fund represents an evolutionary middle ground. (Smaller than many alternative investments, but large enough to provide considerable incentive).
With many institutional investors still willing to pay 2 and 20 to hedge funds, a gradual transition towards investment vehicles with lower fee structures might be a relatively best case scenario.