The S&P Hedge Fund Index and the S&P Barra Index have been criticised by Mellon and Vanguard respec...
The S&P Hedge Fund Index and the S&P Barra Index have been criticised by Mellon and Vanguard respectively for failing to give a good indication of the fund sectors they cover.
The accusation is that the hedge fund indices hold too few funds to be meaningful, while the definitions of value and growth used in the Barra Index are not broad enough. S&P has refuted the claims.
Derek Stewart, director of Mellon Global Alternative Investments, has claimed that the S&P Hedge fund indices do not give a reliable guide for hedge fund performance because the total universe is too small. With about 39 funds in the index it does not give a good representation of the industry, he said.
For example, the Arbitrage Index contains five convertible arbitrage funds. However, there are more than 100 convertible arbitrage managers. Stewart does not believe it is a true representation of strategy performance.
Peter Roffman, vice president at S&P rebuffed this, saying that sample size does work. the number of funds is not near 6,000 in the institutional market place but rather 400-500.
He said that the risk/return behaviour of randomly selected portfolios tends to converge at around 30-40 funds, making it a representative sample.
The S&P Hedge Fund Index uses three styles these are arbitrage, event-driven, and directional/tactical.
Stewart said that the directional/tactical category groups three very different strategies together, which does not really compare like with like.
Roffman replied that although sub-strategies in the directional portfolio are distinct from each other they still have things in common. They are all tied together because they look at medium term trends.
According to Stewart, the strategy definition for some of the managers may not be 100% accurate. For example, Stewart said the Deephaven Market Neutral Fund is described as a convertible arbitrage only but when he met managers of the fund, the portfolio invested in convertible arbitrage, event driven, statistical arbitrage and volatility arbitrage strategies.
In a separate development, Vanguard is looking to stop using the S&P Barra indices and has sent a note to shareholders concerning permission to change the benchmark for the US tracker funds that use the indices and switch to the MSCI equivalents.
According to Brian Mattes, principal at Vanguard, there has been concern over how S&P constructs its value and growth index. He said sometimes value shares can be considered growth and vice versa. Stocks in the S&P index move back and forth between the two. Vanguard faces a transaction cost when the stocks move between the two.
Lynn Cohn, communications manager at S&P, said the definitions are based on price to book ratios. There is as little turnover as possible so funds do not have additional costs.
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