Averaging out excellence
Investable hedge fund indices might well offer increased liquidity and transparency – the drawback is that they are not truly representative. The whole point of hedge funds is to get access to additional alpha provided by skilled managers, which is not the same as the performance of the average manager. Hedge funds are about absolute return per unit of risk, not about index tracking.
René Herren, head of structured client solutions at Man Investments, attributes index-based product sales to the strength of index branding. "They're selling S&P or MSCI rather than hedge funds," he says. Man considered creating its own hedge fund index but decided against it because it lacked an "index brand". "For liquidity and transparency you don't need an index," he says. "The RMF Transparency fund, for instance, provides exactly the same information and liquidity as an investable index."
A key constraint on investable hedge fund indices is that the underlying constituents must be open to new investment. This restricts the funds that can be included. Many of the best performers are closed. And most index-providers require their managers to run managed accounts alongside their own hedge funds and take the same positions, replicating the hedge fund.