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Portfolio > Alternative Investments > Hedge Funds

S&P Details Methodology and Managers for Hedge Fun

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NEW YORK (–Standard & Poor’s unveiled additional details of its forthcoming S&P Hedge Fund Index; including the names of its underlying managers, as well as a white paper outlining the methodology behind the alternative benchmark.

The new index, expected to officially launch in a matter of weeks, is designed for investors such as pension funds, banks and insurance companies with an investable hedge fund benchmark covering a broad cross-section of the industry and greater transparency.

Funds were chosen for inclusion on the basis of style, performance, level of assets, length of track record, willingness to provide daily transparency and due-diligence factors. The median track record for individual fund managers was six years in a given strategy, while the median assets under management of index components are US$530 million.

Capacity for individual fund strategies was also a criterion the S&P Hedge Fund Index committee looked at when making its choices. And since the index is designed to serve as the basis for investable products, capacity within individual components will be reassessed frequently, according to the white paper.

The universe of funds initially screened for potential inclusion in the index started with a universe of 3,500 funds. About 300 funds from this group met the basic criteria in terms of style categories, while only 50 made it to the final selection round, where managers were screened on the basis of their returns being quantitatively verifiable as well as the management’s willingness and ability to provide transparency, according to the S&P white paper.

Third-party partner, Somerset, N.J.-based Derivatives Portfolio Management verified fund valuations and Albourne Partners Ltd., London, led due diligence screening.

Although the index is designed to be investable, S&P will focus on construction, maintenance and licensing of the benchmark. Bermuda-based PlusFunds is acting as manager for an investable vehicle based on the index, which will be accessible to institutional and high-net-worth investors.

The index is comprised of 40 individual hedge funds, a number chosen by S&P to provide optimal diversification from a risk perspective without diluting return potential or increasing correlations to traditional benchmarks. It is divided into three broad style sub-indexes–arbitrage, event-driven, and directional/tactical.

Arbitrage Sub-Index

The arbitrage sub-index includes equity market-neutral strategies, fixed-income and convertible arbitrage funds.

Included in the equity market-neutral group are: First Quadrant US Market Neutral; Jemmco International Fund Ltd.; Salus Market Neutral Strategy; Thales Fund Management LLC’s Market Neutral Fund; and Zeus Equity Arbitrage Fund Ltd.

Fixed-income funds include: Clinton Group Inc.’s Fixed Income and Mortgage Arbitrage Strategy; Deerfield Capital Management’s Fixed-Income Arb Fund (excluding investment grade corporate securities); Ellington Overseas Partners Ltd.; MKP Offshore Partners; and Priton Capital Offshore Trust.

Convertible arbitrage includes: Clinton Group Inc.; Deephaven Market Neutral Fund Ltd.; Forest Global Convertible Fund Ltd. (Class A-5); SSI Hedged Convertible Market Neutral (Leveraged 3:1); and the TQA Vantage Fund.

Event-Driven Sub-Index

The event driven sub-index is made up of distressed securities funds, merger arb and special situation strategies.

The four distressed funds are: Contrarian Capital Senior Offshore Fund Ltd.; MW Post Opportunity Offshore Fund. Ltd.; Ramius Capital Group; and The Varde Fund (Cayman) Ltd.

Merger arb managers include: Aetos Corp.; KD Offshore Fund CV; the Merger Fund Ltd.; and Canyon Value Realization Fund Ltd. Special situations managers are: Canyon Realization Fund (Cayman) Ltd.; Mariner Investment Group Inc.; Metropolitan Capital Advisors International Ltd.; and Para International Fund Ltd.

Directional/Tactical Sub-Index

The Directional/Tactical-style sub-index is made up of three types of funds–long/short equity, managed futures and macro funds.

Long/short managers include Bricoleur Offshore Ltd.; Cumberland Partners; Lazard Global Opportunities; Omega Overseas Partners Ltd.; and Sparx Long-Short Fund Ltd.

Managed futures programs in the index are: Campbell Financial; Metals & Energy Portfolio (FME Large); Chesapeake Diversified Program; Graham Global Investment Fund Ltd. (Diversified Portfolio); and the Rotella Polaris Fund Ltd.

Macro managers include Big Sky Global Vision LP; Epoch Overseas Ltd.; Millennium Global Currency Fund; and Vega Global Fund Ltd.


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