The Royal Bank of Canada has announced the launch of its own broadly-diversified and representative investible hedge fund index, the RBC Hedge 250 Index.
Launched by RBC's Alternative Assets Group, a business unit of RBC Capital Markets, funds represented in the new index capture approximately 20% of total hedge fund assets under management, including many funds that are closed to new investors, have longer lock-up provisions or have recently launched operations.
Comprised of 250 individual funds, RBC stated that the index contains up to six times the number of funds referenced by other investible indices.
"We have capitalized on RBC's significant experience and relationships in the industry to create the RBC Hedge 250 Index which we believe to be the most representative investible hedge fund index in the market," explained Winson Ho, co-head of the Alternative Assets Group and co-creator of the index.
"There has been a great need in the market for an investible hedge fund index which does a better job of representing the performance of the asset class," Mr Ho added.
Over the past several years, the performance of investible hedge fund indices has significantly lagged that of the non-investible indices by about 5 per cent per annum, based on information provided by the sponsors of those indices.
"This underperformance can be attributed to a number of factors which we sought to address in our development of the RBC Hedge 250 Index," continued Mr Ho.
"As a result, we believe our index will be more successful in reflecting the performance of the non-investible indices," he claimed.
The RBC Hedge 250 Index employs a screening process to identify component funds from a universe of 4,700 funds. The index follows a set of rules to direct and adjust the composition of the index over time.
Unlike other investible hedge fund indices, the RBC Hedge 250 Index references actual hedge funds and not separately-managed accounts. This makes it possible to include a wide range of funds and managers, and not just those that are the most liquid and accessible.
"We believe our proprietary process results in an index which is more representative than other investible indices, and as a result, will more accurately reflect the industry's returns," said Mr Ho.
"So far, this conclusion has been firmly supported by its performance. Since its inception in July 2005, the RBC Hedge 250 Index has had a net return of approximately 9%," he added.
In comparison, over the same period, the non-investible indices have averaged 10% while the other investible indices have averaged 5.5%, according to Mr Ho.
The RBC Hedge 250 Index categorizes hedge funds across nine strategies in four sectors:
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