Back-of-the-envelope analysis shows hedge fund indexes not lining up with each other this fall

Dec 1st, 2008 | Filed under: Performance, Analytics & Metrics, Today's Post | By:
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Regular readers may recall a back-of-the-envelope analysis of hedge fund index dispersion that we ran a few months ago.  We found that there was a significant range in the July returns across data from different index providers.  This dispersion was modest at the composite level, but was quite significant at the sub-strategy level.

The thumbnail chart at the left contains the two standard deviation ranges of various sub-strategy indexes (one standard deviation on either side of the mean across an average of about 8 index providers per index).  If you click on the thumbnail, you’ll see that the highly diversified funds of funds and composite indexes tend to have a minimal dispersion.  However, there was significantly less commonality between the equity market neutral, managed futures, short-bias, and event-driven indexes reported that month.

While November’s results begin to roll in, we ran the same test again on October’s returns (which have all now been fully reported by the providers we track).  With the absolute value of returns significantly larger in October, one might expect the ranges to be commensuratley larger.  As you can see by the chart below, this was largely true (note that we had to set the grid lines at 5% vs. only 1% for July):

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4 comments
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  1. I thought the EDHEC Alternative Indexes was setup to deal exactly with this issue..

  2. Yes. That’s right. Way back in 2003 Edhec developed a set of indexes that were essentially an “average of averages”. At the time, they wrote: “Given that it is impossible to come up with an objective judgment on what is the best existing index, a natural idea consists of using some combination of competing indexes…”. So we’d imagine that Edhec probably experiences the same challenges dealing with dynamically-changing ranges around each sub-index mean.

  3. Nice analysis..

  4. Hennessee Hedge Fund Index
    1987- present

    Hummmmmm !

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