The closed world of hedge funds is taking another step towards the mainstream with the arrival of a new index and greater availability of independent research.
Standard&Poor's introduction of its S&P Hedge Fund Index is the first attempt to offer a transparent benchmark for hedge funds.
The index contains 40 funds, divided into three sub-indices: arbitrage, event driven and tactical. These in turn cover nine different strategies of macro, equity long/short, managed futures, special situations, merger arbitrage, distressed, fixed-income arbitrage, convertible arbitrage and equity market neutral. All are equal weighted in the index to offer a balanced representation of the different investment strategies.
"We believe that the index will fill a void that exists in the hedge fund market," says Paul Aaronson, executive managing director at S&P. "While hedge fund assets have grown significantly over the last five years, that growth has been somewhat restrained by the reluctance of many institutional investors to invest in funds that are typically opaque, run by managers who don't share many details about their operations."
Any funds hoping to get into the index will have to pass quantitative screening tests to ensure that they conform to their stated strategy return and risk characteristics.