Revisiting the Limits of Hedge Fund Indices

Abstract

Hedge fund indices have witnessed steady growth in recent years, reflecting the underlying growth of the hedge funds industry and the increasing variety of product offerings. The interest in indices is mainly driven by institutional investors, who have a strong preference for low fee, transparent and risk controlled investments. The universe of indices available are constructed from a variety of databases, using diverse selection criteria and methods of construction, leading to a multitude of returns for competing indices of the same strategy This article examines whether the problems that are outlined for hedge fund indices also exist for other indices that seem to be widely accepted. This article shows that indices for other asset classes, and most notably stock market indices, face the same type of limitations and problems that hedge fund indices face. It is unclear on what basis hedge fund indices should be subject to discrimination compared to indices for other asset classes.