LONDON (HedgeWorld.com)–Professor Lionel Martellini last week at a conference in London presented his work on creating an alternative index made up of existing hedge fund indexes.
Mr. Martellini, a professor of finance at the University of Southern California, Los Angeles, and French business school EDHEC, has applied numerous mathematical formulas to the leading hedge fund indexes to come up with the best way of building a comprehensive index for the hedge fund industry.
In the research paper put out by the EDHEC Risk and Asset Management Research Center in France, the group proposes the concept that the index of indexes benchmark has a higher degree of representation and stability of hedge fund performance than the indexes already available on the market.
Professors Martellini and Noel Amenc first proposed the concept last year in a working paper titled, “The Brave New World of Hedge Funds,” Previous HedgeWorld Story. Alteram, French hedge fund management firm, became the first company to use the EDHEC indexes, according to officials.
The indexes are compiled using information from the HFR, CSFB/Tremont,* EACM, Zurich Capital, Altvest, Hennessee Group, Van Hedge, LJH Global Investments, Magnum Investments, MAR, HedgeFund.net, Standard & Poor’s, Morgan Stanley Capital International and Barclay indexes.
In developing the new indexes, the EDHEC officials eliminated the alternative investment strategies for which four competitors were available. The strategies with a narrow focus, such as sector-specific strategies, were dropped in order to concentrate on more popular strategies.
The strategies included in the EDHEC Alternative Indexes total 13. They are: convertible arbitrage, CTA global, distressed securities, emerging markets, equity market neutral, event-driven, fixed-income arbitrage, funds of funds, global macro, long/short equity, merger arbitrage, relative value and short selling.
In selecting the underlying indexes, officials considered indexes that were publicly available and contained transparent style classification and construction methodologies, so that users of the EDHEC indexes can check the performance. The S&P, MSCI, LJH Global Investments and Magnum indexes were dropped to total 10 underlying indexes.
The composition of the EDHEC indexes is calculated every three months based on historical performance data of the selected indexes. Going forward the indexes will be updates for the month and will be published on the group’s web site (www.edhec-risk.com) on the third working day of the month.
*Tremont Capital Management Inc., Rye, N.Y., which is a strategic partner of and a minority investor in HedgeWorld.