According to Simon Hopkins, chief executive officer of hedge fund multi-managers the Fortune Group, investable hedge fund indices have registered returns which are typically less than half those produced by funds of hedge funds and with volatility that has sometimes been higher.
He added that while institutions had gravitated towards investable indices offered by recognisable brand-name providers such as Standard and Poor’s and MSCI, these products had also attracted large amounts of money from funds of hedge funds hindered by capacity constraints.
Speaking exclusively to FT Mandate, Mr Hopkins said: “It was reported recently that 30 per cent of the inflows into their hedge fund indices came from other funds of funds, which suggests these vehicles have a capacity issue. They are simply stuffing money into investable indices, so making them unstable. Lots of hedge fund managers won’t participate because they see this money going in and out in a very indiscriminate manner.”
He maintained that investable indices are built by organisations who “are long on structuring skills and very short on investment management skills”.
“An investable index doesn’t have any kind of risk management component,” claimed Mr Hopkins. “It has the worst characteristics of optimisation in that it tends to orientate itself towards those strategies which have recently performed the best, which are not necessarily those that are going to do well in the future. It tends to be reactive rather than predictive.”
He contended that the investable hedge fund index industry was plagued with problems and was plunging “into freefall” on the back of its poor performance.
Funds of funds certainly outshone investable hedge fund indices in 2005. The HFRI Fund Weighted Composite Index, which accounts for over 1600 hedge funds listed on the HFR database, returned 9.25 per cent last year, compared with the paltry 2.72 per cent posted by the HFRX Global Hedge Fund Index and the 1.28 per cent registered by the HFRX Equal Weighted Strategies Index.
But funds of hedge funds failed to beat the 9.49 per cent returned by the MSCI World Equity Index last year.
Mr Hopkins said that institutional investors who are “serious” about investing in hedge funds should look to build customised portfolios with the aid of an adviser. In addition to meeting specific risk-return objectives, he said such specialist portfolios met the requirements of transparency, liquidity and reasonable pricing.
He added that that funds of hedge funds were becoming more specialised.
“The kind of market-neutral catch-all type of fund of hedge fund offering is really in a space where it is very difficult to differentiate one from another in terms of risk-adjusted performance and providers are starting to offer more strategy-specific structures.”
HS
