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Hedges on Hedge Funds Chapter 13

CHAPTER 13 Hedge Fund Indices: In Search of a Benchmark. Hedge fund indices are gaining more notoriety than ever as investors seek ways to benefit from the usefulness of an accurate benchmark by which to measure investment performance. | 13 Hedge Fund Indices In Search of a Benchmark Hedge fund indices are gaining more notoriety than ever as investors seek ways to benefit from the usefulness of an accurate benchmark by which to measure investment performance. Just as a precise benchmark such as the Standard Poor s S P 500 has furthered the equity and mutual fund industries an accurate index can do nothing but accelerate the growth of the hedge fund market. Although a lack of continuous and complete data prevents current hedge fund indices from being the equivalent of the S P 500 they are still good tools for investors. Today s hedge fund indices show recent hedge fund performance within a small degree of error and help investors determine expectations of their own hedge fund investing experience. See Table 13.1. Beginning in 2004 the Wall Street Journal began publishing several hedge fund strategy indices in an effort to capture performance. Additionally many firms are establishing a presence either through their own proprietary set of indices or through a much-debated passive investment approach. These indices whether characterized as investable or simple benchmarks track either a specific fund style or the overall hedge fund market. Despite the many inconsistencies and biases associated with them hedge fund indices have the ability to reasonably characterize the directionality of hedge fund performance. Relative benchmarks for hedge funds do make sense and should be utilized as a directional gauge. As the 187 188 HEDGES ON HEDGE FUNDS TABLE 13.1 Hedge Fund Indices Performance in 2003 Index 2003 YTD Return 1. Hennessee H. F. Index 19.69 2. HFRI Fund Weighted Composite Index 19.56 3. Van U.S. Hedge Fund Index 19.00 4. CSFB Tremont Hedge Fund Index 15.44 5. The Bernheim Index 15.30 6. MSCI Hedge Fund Composite Index 14.71 7. EACM 100 Index 12.40 8. S P Hedge Fund Index 11.10 9. InvestHedge Composite Index 9.28 Disclaimer The information and statements of facts in this table are based on sources LJH