markets And strategies
Hedge fund indices are limited in their use to investors, according to Jamie Murray, head of marketing at HSBC Republic Investments.
While hedge fund indices can provide a basic picture they face complications which make their data difficult to compare, he told the Alternative Investment Summit in London last month.
There are data collation problems faced by all hedge fund indices. Not all hedge funds provide data to indices, sometimes because they are closed or because they are suffering poor performance, which they do not want to advertise.
There is also an element of survivorship bias caused by poor hedge funds that fail and drop out of indices taking their poor performance figures with them ' this means indices might be inflating the industry's overall returns.
Comparing one index with another, even when they cover the same strategy, is unreliable because they may look at different selection criteria and classify funds into styles differently.
Weighting schemes also differ as does benchmark rebalancing, he added. Some benchmarks rebalance annually and others monthly.
Indexes can be useful on a basic level but they do not help investors understand what a fund is doing, said Murray. To choose a fund investors are best to combine both quantitative and qualitative research, in- cluding a visit to the manager, he added.
Many hedge funds are small businesses where a meeting with the managers can enlighten investors on the instruments used, risk controls, fees and liquidity restrictions.
Finding out who the other investors are is also useful, he said, because if there is just one other large shareholder it may be a reason to steer clear.
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