Hedge Fund Reader : What in the Heck are Hedge Fund Indexes?!?

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January 19, 2006

What in the Heck are Hedge Fund Indexes?!?

While reading about the hedge fund industry, you might have come across the term ‘Hedge Fund Index’ many a times. Well to give you a brief idea about these, what we can say is that Indexes are just a compilation or averaging of all the Hedge Funds in a particular sector (much like an Energy Fund is for all the energy stocks) Hedge Fund Indexes are often used as hedge fund performance measurement and benchmarking tools, which are useful as summary statistics for the universe of managers. These indexes offer a benchmark for strategy performance to the extent that they are investable, and to the extent that funds within a given strategy classification are also comparable.

Usually the indexes encompass all the funds in the FRM database and are equally weighted and rebalanced annually. The most important observation about indexes of hedge funds is that they exhibit considerably lower risk than traditional active managers and passive benchmarks. These indexes are a good way to track hedge fund sector as a whole and also compare a particular fund against the benchmark index.

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January 19, 2006 in Research | Permalink