the index is aiming for transparency with daily pricing a feature
Standard & Poor's has put in place plans for an investable hedge fund index, allowing hedge fund tracker funds to be launched.
The aim of the S&P Hedge Fund Index, which is to be launched in the third quarter, is to provide a transparent benchmark of the hedge fund asset class, according to the international ratings group, one that is broadly representative of the range of major strategies that hedge funds employ.
The index will contain 40 funds divided into three sub-indices: arbitrage, event driven and tactical, which in turn represent a total of nine specific strategies.
These strategies include: macro, equity long/short, managed futures, special situations, merger arbitrage, distressed, fixed income arbitrage, convertible arbitrage and equity market neutral.
The strategies will be equal weighted to ensure well-rounded representation of hedge fund investment approaches and to avoid over-representation of currently popular strategies.
Potential index constituents must pass a series of quantitative screening criteria to ensure that they conform to their stated strategy's return and risk characteristics.
After this screening, eligible funds must agree to offer daily transparency so that their valuations can be verified by a third party, in this case Derivatives Portfolio Management (DPM), and so that the index may be computed on a daily basis.
Finally, the candidate funds must pass a due diligence process conducted by Albourne Partners Ltd, a hedge fund consultant to Standard & Poor's, to ensure that they are appropriately managed, adhere to their stated strategy or style, and maintain all necessary risk controls and operational infrastructure. Index values will be posted daily to the www.spglobal.com website.
Paul Aaronson, executive managing director, Standard & Poor's, said: 'Criteria for inclusion in the index was capacity for new investments and daily transparency to enable us to create a daily-priced index.
Initially there was some hesitancy and concern from fund managers that Standard & Poor's would want to know what was in the underlying hedge portfolio and disclose that.
Once reassured, Aaronson said the group has not had any problems signing up the necessary funds and the group now has commitments from 40 funds.
Aaronson said the portfolios are not necessarily the best or the biggest funds but, based on the group's quants screen, they do provide a good representation of each of the nine strategies.
As the funds close, Aaronson said they may not be taken out of the index right away but could continue to be tracked. The index will be overseen by a management committee, which will oversee the annual rebalancing.
He said: 'While hedge fund assets have grown significantly over the last five years, that growth has been somewhat restrained by the reluctance of many institutional investors to invest in funds that are typically opaque, run by managers who don't share many details about their operations.'
As part of the creation of the index, Standard & Poor's has granted PlusFunds, a developer of passive hedge fund investment products and a service provider for the hedge fund industry, an exclusive license to develop certain investment products based on the index.
Funds tracking the index can only be launched by PlusFunds although other groups can use the index as a benchmark.
Christopher Sugrue, chair- man of PlusFunds, said: 'Indexing is the next major development in the hedge fund industry. We believe the S&P Hedge Fund Index is well diversified and that it represents a good vehicle for providing well-defined market exposure.'
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