HEDGE FUND PURISTS argue that indices run counter to the entire concept of generating risk-adjusted absolute returns through active investment management, and frequently dismiss indices as a gimmick used as a marketing tool to attract new investors. Investable index providers claim that they can offer the benefits of a diversified fund of hedge funds at a substantially lower cost, with more transparency and higher liquidity.
The truth lies somewhere in between. To understand the role investable indices might play in an investor’s portfolio and their strengths and weaknesses, it is important to understand how the indices function.
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