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Zurich Financial Publishes Hedge Fund Indices

by Carla Johnson, Investors Offshore.com, London

26 June 2001

Earlier this year, Zurich Capital Markets Inc., announced that it would create a set of hedge fund indices in partnership with TRS Associates, to track the returns achieved by hedge fund managers. The indices are now live on Zurich Financial's site at www.zurichcapital.com.

The indices differ from existing hedge fund indices by focusing only on those funds/managers most likely to be considered for investment by institutional investors or sophisticated investors. When evaluating hedge fund offerings, institutional investors as well as other sophisticated investors generally demand liquidity, transparency and return consistency within a predefined hedge fund universe or benchmark that captures the fundamental return process of the strategy. Institutional investors also tend to avoid strategies that employ significant leverage or make extensive use of complex derivatives. With these considerations, the first series of the Zurich Hedge Fund Indices are structured to meet the concerns of institutional investors and will track the performance of a specific set of hedge fund investment strategies of interest to these investors.

Only those funds that satisfy institutional criteria for length of track record and assets under management are considered for inclusion in the Hedge Fund Indices. Further checks are made to ensure that fund performance is consistent with the managerıs self-reported investment style. As a result, the Zurich Hedge Fund Indices reflect the performance that an investor with stringent guidelines for liquidity, transparency, manager track record and style purity would expect from an allocation to hedge funds.

Zurich Capital Markets (ZCM) serves as a special financial structuring unit of the Zurich Financial Services Group.

Says ZCM: 'Established in 1997, ZCM's mission is to provide world-class capabilities and innovation in the area of financial protection and enhanced-return investments. Acting as principal and through the delivery of products in such areas as Combined Risk, Structured Finance, Alternative Investments, Enhanced-Return Investments, Credit Derivatives, Securities Lending and Municipal Trust Certificates, ZCM has proven its ability to create innovative, highly customized and often non-traditional solutions to the most challenging economic, legal, tax, accounting and regulatory issues for clients worldwide.

The Zurich Hedge Fund Indices, explains ZCM, have been developed for use by institutional and other sophisticated investors for use in evaluating manager performance and asset allocation. The methodology used to construct the Indices ensure that Index returns is representative of the subset of hedge funds that satisfy criteria for investment based on current best practices.

Within the Zurich approach to index construction, styles are selected first and only those managers whose returns closely reflect that investment approach are included in the Index. Hedge funds that do not have a clearly defined style are not included in the Indices, even if the manager has a long, successful track record and sizeable assets under management.

The Indices are equally weighted. They are governed by an Index Committee charged with ensuring their continued evolution. In this regard, investment practices, regulations and trading styles evolve over time.

The Indices were developed to reflect the investment practices common to its target market, specifically institutional investors including pension funds and endowments. Specifically, the Indices are constructed to have the following attributes and processes:

UNAMBIGUOUS - The hedge funds included in the Indices and the weight assigned to each fund in the Indices' return calculation are fully disclosed and readily obtainable. Guidelines for altering the components and weights are specified in advance. Changes in index composition are also announced in advance.

INVESTABLE - While the individual "style" indices themselves may not be directly investable, it is expected that investors would be able to earn the returns associated with the indices with modest tracking error and at relatively low cost.

MEASURABLE - Investors have access to the prices or returns used to compute the Indices so that individual Index returns can be independently verified.

APPROPRIATE - The Indices exclude funds that a typical institutional investor would not hold, and employ common-sense weighting schemes and quarterly rebalancing approaches.

ACCOUNTABLE - Changes in the Indices' components and computation made by a committee whose membership is public, and are based on established and explicitly articulated procedures.

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