New Indexes for Hedge Funds
Collins, Daniel P., Modern Trader
Zurich Capital Markets launched a series of indexes in March that track five hedge fund strategies. These indexes will help institutional investors and hedge fund managers understand how a strategy should be performing, absent manager skill. The strategies are convertible arbitrage, merger arbitrage, distressed securities, event driven and hedged equity.
"First and foremost, the indices provide a tool for institutional investors to measure the performance of their hedge-fund investments and, secondly, provide an asset allocation tool," says Garry Crowder, managing director of Zurich Capital Market's index platform. Though the indexes were mainly designed to provide institutional investors with a measuring stick for certain investment strategies and create a brand name for Zurich, The Zurich Institutional Benchmark Series, the hedge fund based on the indexes has collected $315 million in just over a month. Crowder says the hedge fund will reach $1 billion before the end of the year and $2-$3 billion by the end of 2002. He calls their methodology clean, concise and completely transparent.
"The [indexes] were designed to reflect investment practices common to its target market," says Crowder. He lists five keys for an index: appropriate [meaning it measures what it says it measures], unambiguous, investable, measurable and accountable.
To qualify to be included in the index, a hedge fund must be active for more than three years. Crowder says their strategy weeds out chronic underperformers and those doing something different than a specific hedge fund strategy. He notes that some funds may vary from their strategies to aid performance.
While Crowder believes his methods create a truer index, others question the selection method. "You can't have a representative sample by excluding new, small or poor performing managers," says Meredith Jones, director of research for Van Hedge Fund Index. Van indexes 18 different hedge fund strategies and doesn't exclude any hedge fund managers who report to them. Van claims the largest proprietary database of hedge fund information.
Crowder says weeding out poor performers and newer managers improves the overall accuracy of the index. "An investor is able to make informed decisions on what an asset class can return to their portfolios," Crowder says.
Zurich is "looking to expand into other markets,...providing indices for certain segments of alternative investments," he adds, such as a base of commodity trading advisors. He says that is part of the reason Zurich recently acquired the alternative investment funds database of MAR.
Comparing index returns March 2001 S&P 500 Total Return Index -6.34% -11.86% Lehman Brothers Treasury Index -0.46% +1.67% Lipper Balanced Fund Index -3.23% -5.01% Morgan Stanley EAFE Index -6.91% -14.03% Futures Public Funds (March) +6.55% +6.76% March's top CTAs March 2001 Barclay Futures Index +4.47% +2.01% Barclay CTA Index +4.20% +3.48% Barclay Sub-Indexes: Agricultural Traders -1.40% -7.16% Currency Traders +4.15% +4.67% Diversified Traders +6.06% +5.42% Financial and Metals Traders +3.98% +5.31% Discretionary Traders -0.18% -0.56% Systematic Traders +5.67% +5.45% More than $10 million under management 1. Beach Capital Mgmt. Ltd. (Dis. 3XL) +19.48% +18.08% 2. Willowbridge Associates (Siren) +18.40% +16.47% 3. Tuscan Asset Mgmt. (Global) +17.42% +15.62% 4. John W. Henry & Co. (Original) +17. …