Others disagree: "Does it make sense to buy a tracking product in the hedge fund sector?" asks Jacob Schmidt, adjunct professor of investments at Webster University’s London campus and director of global hedge fund rating and research at Allenbridge Hedgeinfo, a U.K.-based fund management performance monitoring firm. "They are vehicles that have an alpha—an ability to outperform," he notes. "What is the logic of buying a beta [an average] of that alpha? You may be minimizing your risk but you receive an average return in exchange, not an outstanding return."
Investors to whom this lower-risk and lower-average-return strategy appeals still have to pick the right index—no simple task. The index providers differ in important ways. Oliver Schupp, president of Credit Suisse First Boston Tremont, an index provider affiliated with investment bank Credit Suisse First Boston in New York, says: "The main requirement must be an accurate representation of the [hedge fund] universe and objective index construction." By objective, Schupp means the rules for choosing the index’s funds should not be open to meddling.
 CSFB Tremont’s 60-fund investable index is drawn from 448 funds in the company’s broader index. Those select few to qualify for the elite investable index must fulfill liquidity and disclosure requirements. The index encompasses the six largest funds that meet the requirements in each of 10 subsectors (such as long/short equity, convertible arbitrage, and event driven). At launch on August 1, the 60 funds boasted a total of $55 billion in assets, making them, collectively, the largest investable hedge fund index on the market. (The S&P investable index, launched in September 2002, by comparison, comprises 40 funds drawn from nine sectors.) (Click chart thumbnail to view)
The composition of indices, like that of a poorly cellared Bordeaux, can change over time. The rise or fall in popularity of an individual hedge fund investing style directly affects its weighting in CSFB Tremont’s index. "The hedge fund index is an asset weighted index and is determined by the assets under management of each respective fund," explains Schupp. "If, for example, the convertible arbitrage sector gets a large inflow over time, the relative weight of that sector will increase in the index."
|
; function voidFunc() { } voidFunc(); "Chart thumbnail")
