
Alternative investment currently represents 750 billion dollars in managed assets according to the latest estimations from TASS ResearchTM. Institutional investors’ increasing interest in alternative investment confirms the fact that it is rapidly becoming part of mainstream asset allocation decisions. At the end of 2003, over 55% of the assets managed by alternative funds came from institutional sources (compared to only 19% in 1992). The massive inflow of capital (according to TASS ResearchTM, the hedge fund industry reached a record flow of $72.2bn in net assets in 2003, with institutional investors being the main contributors) has thus brought an end to the relatively confidential nature of alternative investment strategies, which can no longer reasonably be considered to be a marginal activity within the asset management industry. Major asset management houses expect that the long-term growth rate of assets under management by hedge funds should be around 15%.
There are however a number of obstacles to the industrialization of the alternative investment industry. Its adoption by institutional investors will only come about if a serious effort is made in terms of transparency and rationalization of the investment management process and, above all, performance evaluation.
Due to the scarcity of information, the logic of representativeness through market capitalization is difficult to apply to the alternative universe. As a result, finding a benchmark that is representative of a particular management universe is not a trivial problem.
The different indexes available on the market are constructed from different data, according to diverse selection criteria and methods of construction, and they evolve at differing paces. As a result of this heterogeneity, investors cannot rely on competing hedge fund indexes to obtain a “true and fair” view of hedge fund performance. Investors are therefore at a loss when selecting benchmarks.
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 (i.e. hedge fund indexes available on the market) to reach a better understanding of what the common information about a given investment style would be. One straightforward method would involve computing an equally-weighted portfolio of all competing indexes. Because competing indexes are based on different sets of hedge funds, the resulting portfolio of indexes would be more exhaustive than any of the competing indexes it is extracted from. We push the logic one step further and suggest using factor analysis techniques to generate a set of hedge fund indexes that can be thought of as the best possible one-dimensional summaries of information conveyed by competing indexes for a given style, in the sense of the largest fraction of the variance explained. Technically speaking, this amounts to using the first component of a Principal Component Analysis of competing indexes.
EDHEC-Risk Alternative Indices are thus able to capture a very large fraction of the information contained in the competing indexes (e.g. the average percentage of variance explained by the Indexes is 79.12% across all sub-universes).
On the one hand EDHEC-Risk Alternative Indices generated as the first component in a factor analysis have a built-in element of optimality, since there is no other linear combination of competing indices that implies a lower information loss. On the other hand, since competing indexes are affected differently by measurement biases, searching for the linear combination of competing indexes that implies a maximization of the variance explained, leads implicitly to a minimization of the bias. As a result, EDHEC-Risk Alternative Indices tend to be very stable over time and, as a result, easily replicable.
Return Estimates
Hedge Funds usually only disclose their performance a few weeks after month end. As a result, hedge fund indexes tend to publish their performance relatively late, which may leave practitioners at a loss. To compensate for this lack of timeliness, some index providers have decided to post preliminary returns on their website. In response to practitioners’ needs, the EDHEC Risk and Asset Management Research Centre releases the preliminary performance of its Alternative Indices on the 17th of M(onth) + 1.
It should be noted that preliminary returns are only meant to be used as an initial estimation of the indexes’ performance. The final returns of the EDHEC-Risk Alternative Indices will be published on the web site on the 3rd working day of M(onth) + 2, once all the indexes entering into their composition have published their final results. Only these returns will constitute the official historic performance of the EDHEC-Risk Alternative Indices.
Attachments
Presentation of the EDHEC-Risk Indices at GAIM 2003
EDHEC-Risk Indices Composition – Latest update (June 2018)
Full presentation brochure of the EDHEC-Risk Alternative Indices
By accessing this tab via the website, users signal their agreement with the conditions and clauses set out below and pledge to abide by them.
The purpose of these sections is to showcase and present academic research only. It seeks to provide information concerning non-investable indices and a database that may be used for research purposes. None of the information may be considered as constituting an offer of products or services, particularly of financial products, on the part of EDHEC-Risk Institute, nor as a solicitation to purchase or sell securities or any other investment product.
EDHEC-Risk Institute does not offer any online services, nor any benefits and makes no pledge whatsoever to maintain the continuity of its research production.
EDHEC-Risk Institute reserves the right to amend these conditions at any moment without notice, with publication of the new conditions being deemed to constitute notification to users and indicate their consent.
The general structure of this website, as well as the texts, graphics, images, sounds and videos that comprise it, are the property of EDHEC-Risk Institute. Any representation and/or reproduction and/or exploitation of the content and services proposed by Investment Solutions, either partially or in full, by any process whatsoever, without prior written authorisation from EDHEC-Risk Institute is strictly forbidden and liable to constitute an infringement of articles L 335-2 et seq. of France’s Intellectual Property Code (Code de la propriété intellectuelle).
Any representation and/or reproduction and/or exploitation of EDHEC-Risk Institute’s trademarks, either partially or in full, in any manner whatsoever, is totally prohibited.
This website is designed for personal ends and not for commercial purposes.
EDHEC-Risk Institute may in no case be held liable for any form of direct or indirect loss, nor any other prejudice in any form whatsoever, resulting from the use of this section or the impossibility of using it for any reason whatsoever, whether such liability is or is not contractual, tortious or quasi-tortious or if founded on the principle of liability without fault or other, and even in the event that EDHEC-Risk Institute may have been warned of the eventuality of such loss or prejudice.
-EDHEC-Risk Institute may not be held liable for the use of the information available in this website; EDHEC-Risk Institute does not guarantee that the information is free from error; consequently, any use that users make of the information is done so at their own risk;
-none of the elements contained on the site constitute asset allocation advice, financial or investment advice or advice of any other nature;
-none of the indices on this site shall be used or referenced as a benchmark by any financial instrument, financial contract or investment fund where such use or reference falls within the scope of Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 and EDHEC-Risk Institute shall not be responsible for any such use or reference.
-the projections presented are based on simulations; past performances in no way guarantee future performances. The information provided may in no way be deemed to represent investment guarantees or investment-return guarantees.
This list is not limitative.
This tab may contain hypertext links to other sites on the internet. The links towards these other resources lead you to exit this site.
These links and sources of information are provided for users purely for informational purposes only. EDHEC-Risk Institute has no authority over the content of characteristics of these other resources and may in no case be held liable for their content or for any loss or prejudice that may result from their use.
Users must take the necessary precautions to ensure that the said resources do not contain any viruses or any other malicious elements.
The user hereby accepts the characteristics and limits of internet, and recognises in particular that:
EDHEC-Risk Institute does not assume any liability for the services accessible by internet and does not exercise any control in any form whatsoever over the type and characteristics of the data that might transit via its server centre.
The user recognises that the data circulating on internet is not protected, particularly against possible misappropriation. Communication of any information deemed by the user to be sensitive or confidential is done so at the user’s own risk and peril.
The user recognises that the data circulating on internet may be regulated in terms of use or be protected by a right of ownership.
The user is solely liable for the use of data that he/she consults, searches and transfers on Internet.
The user recognises that EDHEC-Risk Institute does not possess any means of controlling the content of the accessible services
Both this site and its terms and conditions of use are governed by French law, wherever the place of use. In the event of any dispute, and after the failure of all attempts to find an amicable solution, the French courts of Lille shall be the sole ones competent to adjudicate such disputes.
By closing this window, the user certifies that they are aware of these disclaimers and accept their terms and consequences.