Man Investment Expert Examines Effectiveness Of Hedge Fund Indices

by Philip Morton, Investors Offshore.com

30 September 2003

Writing for the September edition of Banker Middle East, Antoine Massad, associate director and head of Middle East and Asia for Man Investments examined the pros and cons of hedge fund indices as a means of assessing the performance of the sector, and of individual funds.

"Hedge fund indices have evolved partly in response to a desire by investors and industry participants to have a benchmark, or an indication of peer group performance, against which they can compare or analyse the performance or achievements of an individual hedge fund manager or fund," Mr Massad explained, continuing:

"While there is no doubting the usefulness of an independent benchmark, investors should realise that hedge fund performance is highly dependent upon the individual skill of an investment manager, which no index will ever be able to measure."

Concerns raised with regard to the reliability of hedge fund indices by Mr Massad included doubts about data accuracy (given that performance reporting to indices is voluntary), and survivorship bias, created when funds which fail are simply removed from the index, giving the benchmark "an upward historical performance bias and a downward historical risk bias".

He also cited varying selection criteria and manager skill as other factors likely to influence the figures reported by hedge fund indices.

He concluded by observing that:

"We cannot expect to look at indices and project the general picture of performance they might present onto individual fund managers...In an industry where returns are largely a function of manager skill, it is crucial to be selective and to actively seek out managers with a competitive edge."

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