Hedge Fund Indices May Pull Sector's Teeth, Report Warns

by Philip Morton, Investors Offshore.com

12 June 2003

Experts have expressed concen at the growing number of hedge fund indices, warning that they could tame the sector, according to a Financial Times report.

Reporting on the launch of a new 'index of indexes' by French business school, Edhec, the FT observed that:

'The expansion of hedge funds into the institutional market has raised the stakes. Pension funds and other institutional clients - now accounting for half the assets managed by the alternative investment industry - have a craving for benchmarks...They want to be able to demonstrate that the asset class can be satisfactorily defined and has attractive return/risk characteristics that make it worthwhile. They also need to measure their skill in fund selection and sector allocation.'

The business daily warned that indices have caused problems in the conventional equity market in the past, creating distortions by encouraging front running ahead of constituent changes. This practice reportedly had a particularly adverse effect on the technology sector in the late 1990s, until free float adjustments to weightings were introduced.

The report concluded by revealing that:

'Edhec Alternative Indices are published monthly at present, a month in arrears. Alarmingly, they may one day come out minute-by-minute. Then there will be no hiding place out there for hedge funds.'

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