FRANCE - French business school EDHEC, specialising in asset management, has launched an “index of indices” for alternative investments. It says the aim is to provide institutional investors with a better benchmark for their hedge fund investors.
Currently there are more than a dozen hedge fund indices. A team from EDHEC’s risk and asset management research centre near Nice proposes to incorporate data from all of them within a single index
Lionel Martellini, who heads the development of the index, told a conference in London that existing indices were unrepresentative of the total hedge fund universe and provided no consensus on the definitions of different investment styles. There was also wide divergence in performance. “Existing hedge fund indices offer very contrasted views of hedge fund returns,” he said.
“The EDHEC Alternative Indexes builds on top of the work of the existing hedge fund index providers by constructing a portfolio of their indices. We are able to stand on their shoulders, so to speak.”
The weighting of each of the indices used is based on a recognised statistical method “principal component analysis” which guarantees that the EDHEC indices are as representative as possible, said Martellini.
“The advantages of this approach is that the index is more representative and less biased,” he said. “It is stable and easily replicable and, as a result, will provide better benchmarking.”
Simon Ruddick, managing director of Albourne Partners, alternative investment consultants, said that institutional investors, with responsibilities to trustees and other third parties, needed hedge fund indices. “The EDHEC index is incredibly useful work, reflecting what the benchmark hedge fund universe is like,” he said.
However, Ruddick warned that there were opportunity costs attached to an index that was too broad. “When it comes to benchmarking, our experience is that institutional investors feel more comfortable with a index that is investable, because it contains alternatives that they could actually have gone out and bought themselves.”