Altvest, New York (www.altvest.com) tracks 13 strategies from a database that allows managers to input their own data. Each fund is assigned to the category in which the largest percentage of its assets is invested. There are no performance criteria for inclusion in the index. Index results are based on reports from more than 1,400 Hedge funds in a database of 1,800 funds. Data goes back to 1993.
Altvest is owned by InvestorForce and the website requires registration in order to gain access to the indices.
Capital Markets, EACM (www.eacmalternative.com), is based on 100 funds selected to be representative of 13 strategies, arranged in five clusters. The index is an equally weighted composite of unaudited performance information provided by the funds. EACM bases its results on the same funds from month to month, allowing no manager who had a bad month to avoid inclusion. Funds are assigned categories on the basis of how closely they match the strategy definitions. Names of the funds are
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not disclosed. The index is rebalanced annually. It was launched in 1996 with data going back to 1990. Capital Markets is owned by Evaluation Associates.
Credit Suisse First Boston/Tremont(www.hedgeindex.com) covers nine strategies and is based on 340 funds, representing $100 billion in invested capital, selected from a database of 2,600 funds. It is the only asset- (capitalization-) weighted Hedge fund index. The CSFB/Tremont Index discloses its construction methods and identifies all the funds within it. CSFB/Tremont accepts only funds (not separate accounts) with a minimum of $10 million under management and an audited financial statement. If a fund liquidates, its performance remains in the index for the period during which the fund was active in order to minimize survivorship bias. The index was launched in 1999, with data going back to 1994. It incorporates the TASS+ database.
Hedge Fund Research(www.hfr.com) includes 29 categories plus subtotals.
The index is equally weighted and based on 1,100 funds, drawn from a database of 1,700 funds. Funds of funds are not included in the composite index. Funds in the database represent $260 billion in assets. The index was launched in 1994 with data back to 1990. Funds are assigned to categories based on the descriptions in their offering memorandums. The indices aim at eliminating the survivor bias problem by incorporating funds that have ceased to exist.
Hedgefund.net(www.hedgefund.net) covers 31 strategies arranged into three subtotals. Called the Tuna Indices, they are updated from a database of 1,800 Hedge funds and funds of funds. The data goes back to 1979 and managers select their own categories. HedgeFund.Net is operated by Links Securities LLC, an NASD reg- istered broker–dealer and owned by Links Holdings and Capital Z Investments.
Hennessee Group(www.hedgefnd.com) reports 22 investment-style categories.
The indices were created in 1987 and first published in 1992. Results are based on 450 funds, including 150 in which Hennessee clients are invested, from a database of 3,000 funds. Assets of $160 billion are represented in the index. Each reporting fund is placed in the category that reflects the manager’s core competency.
LJH Global Investments (www.ljh.com) tracks 16 different equally weighted indices, each composed of approximately 50 managers. It is the only index that presents performance exclusively in graph form. To be included, funds must have an audited statement and have passed some level of LJH due diligence. Funds are
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assigned to categories based on LJH’s screenings. The index is rebalanced quar- terly or semi-annually, depending on the strategy. For a fee, LJH provides data on index components.
MAR Futures (www.marhedge.com) reports especially on the performance of Managed Futures strategies in each of 15 categories, ten of which are combined into four sub-medians. The variety of Zurich (formerly MAR) index databases contains 1,300 funds. Managers usually select their own categories. The firm’s website iden- tifies the number of funds and assets in each category. MAR, the former publisher of the index, sold its database business to Zurich Financial Services in spring 2001.
A new index from Morgan Stanley Capital was announced to be available in the second half of 2001. It will not be investable initially, although the option remains under consideration. Morgan Stanley Capital claims that its index will be
‘institutional-brand quality’ and that it will be ‘different’. The database for the new index will come from Financial Risk Management in London, an institutional asset manager investing in Hedge funds.
The Parker Currency Trading Index(http://www.parkerglobal.com/fxindex.htm) is a performance-based equally weighted benchmark that measures the returns of global currency managers. In addition to the Parker FX Index, there are two style-driven sub-indices: the Parker Systematic Index and the Parker Discretionary Index. The former tracks those managers whose decision process is rule based and the latter tracks those managers whose decision process is judgmental. The Parker FX Index currently includes 43 programs managed by 37 firms located in the USA, Canada, UK, Ireland and Switzerland. The 43 programs manage over $8 billion in currency assets and include a combination of 33 programs that are systematic and ten programs that are discretionary. Disciplines include technical, fundamental and quantitative.
Van Hedge Fund Advisors International(www.vanhedge.com) is derived from the performance of an average of more than 750 funds separated into US and off- shore funds covering 14 strategies and combined into a separate global index. There are no performance or size criteria and funds are assigned to categories based on their offering memorandums and interviews with the individual managers.
Zurich Capital Markets (http://www.zcmgroup.com) provides the Zurich Hedge Fund indices in partnership with TRS Associates to track the performance of various Hedge fund strategies. They differ from existing Hedge fund indices by focusing
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only on those funds/managers most likely to be considered for investment by institu- tional and other sophisticated investors. Focusing is on those funds/managers that:
(1) are strategy pure in their style; (2) have a two-year minimum performance track record; and (3) have sufficient assets under management to demonstrate organiza- tional and managerial infrastructure, scalable strategies and the ability to raise funds from sophisticated investors. Highly leveraged strategies and strategies involving complex derivatives are excluded. There is no requirement that these funds be open to new investments, because the indices themselves are not designed to be directly investable and are constructed only to reflect the returns of a particular Hedge fund strategy. The indices are equally weighted.
Notes
1. There are numerous empirical studies showing the benefits of AIS in traditional portfolios. Please refer to ‘The Benefits of Alternative Investment Strategies in the Institutional Portfolio’ by L. Jaeger, saisGroup Research Paper, 2001, available on http://www.saisgroup.com; ‘The Benefits of Hedge Funds’ by T. Schneeweiss and G. Martin, Lehman Brothers Publications, 2000; ‘Portfolios of Alternative Assets: Why not 100% Hedge Funds?’ by R. McFall Lamm Jr., The Journal of Investing, Winter 1999; ‘The Performance of Hedge Funds: Risk Return, and Incentives’, Ackermann et al., Journal of Finance, 1999.
2. An excellent and more detailed discussion of the empirical properties of AIS is provided by A. Ineichen, ‘In Search of Alpha’, October 2000.
3. The Sharpe ratio, however, is not the only and arguably not the most appropriate measure for risk-adjusted performance. There is a large variety of different performance measures. Please refer to Dacorogna et al., ‘Effective Return, Risk Aversion and Drawdowns’, Physica A, January 2001, 289, p.229–48 for an excellent discussion and further references.
4. Kurtosis is most often defined as (where m is the mean, σthe standard deviation and k a normalization factor). The kurtosis of the standard normal distribution is three. In the numbers presented here, kurtosis is defined as
x–m .
k
∫ (
____σ)
4 dx – 3x–m k
∫ (
____σ)
4 dx8409 Chapter 4 p111-135 11/4/02 1:13 PM Page 134
5. See ‘Performance Characteristics of Hedge Funds and Commodity Funds:
Natural versus Spurious Biases’ by W. Fung and D. Hsieh in the Journal of Financial and Quantitive Analysis,2000.
6. See also the work by Schneeweiss Partners, A Review of Alternative Hedge Fund Indices.
7. A discussion of the different issues in AIS index construction is also presented in ‘Hedge Fund Indices’ by G. Crowder and L. Hennessee, Journal of Alternative Investments, Summer 2001; see also ‘The Benchmark Bane’ in The Economist, August 31, 2001.
8. See also the article by G. Amin and H. Kat, ‘Welcome to the Dark Side:
Hedge Fund Attrition and Survivorship Bias over the Period 1994–2001’.
9. sGFI stands for ‘saisGroup Futures Index’, a systematic Passive Futures strategy index developed by the author and his partners at saisGroup (now Partners Group). Please refer to the following article for further details about this index: L. Jaeger, P. Cittadini and M. Jacquemai, ‘The saisGroup Futures Index (sGFI) – A New Passive Futures Investment Strategy’, available on
http://www.saisgroup.com.
10. See the article by C. Asness et al., ‘Do Hedge Funds Hedge?’
11. The study was published in German in the Neue Zürcher Zeitung(Jan 8, 2002): ‘Hedge Funds in Marktturbulenzen’.
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C H A P T E R 5
Risk in Alternative Investment Strategies
Alternative Investment Strategies entail the search for ‘alpha’ combined with the proper management of the underlying risks. Whereas for traditional investments, sector and instrument selection next to portfolio diversification are the key per- formance drivers, for AIS it is strategy sector selection together with downside risk management, which are the most critical determinants of investment perform- ance. In Chapter 3, I outlined the return drivers and risk characteristics of the single AIS sectors. In this chapter, I discuss general risks and the strategy-specific risk management principles of AIS. In Chapter 7, I go on to outline the top down sector and bottom up manager selection process in an integrated risk management framework for the AIS portfolio. Important here will be the distinction between
‘pre-investment’ risk management (‘top down’ strategy allocation, ‘bottom up’
manager due diligence, portfolio diversification) and ‘post-investment risk man- agement’ (monitoring, active risk control).