Hedge funds

CFA Level III Portfolio Management
#1

Hi,

What does this really mean “Indices that are value weighted, as opposed to equally weighted, may take on the return characteristics of the best-performing hedge fund over a given period. These indices thus reflect the weights of popular bets by hedge fund managers, because the asset values of the various funds change as a result of asset purchases as well as price appreciation”

Thanks

#2

I believe what they mean is that as certain hedge funds perform better by making “good” bets, they attract more inflows of capital and as a result, the hedge fund will grow as a component of the value weighted index.

#3

I believe as certain hedge funds perform better, their asset under management is growing rapidly and thus value weighted indices are biased upward to best performers. This is one of the key characteristics of VWI.

#4

I’m here to throw a curveball at Derswap07… which comment is most likely the correct answer? PewPew or Flashback?

#5

I think theyre both okay, but if I had to choose a better one I’d go with pewpew. No offense to flashback! His answer is proper too.

#6

thanks both. Good answers

#7

Flashback is correct here.

Weighting schemes on indices have nothing to do with “active bets” of the managers. Where did you see that statement because it’s not correct?

value weighted indicies for hedge funds are biased to the top performing managers because the top performers will attract the most assets/investors and thus have the highest AUM and thus carry the most weight. Just as Flashback said.

#8

Ya the more I read it I’d have to agree with you. But that good bet comment isn’t wrong, although maybe not worded the best. Pewpew and flashback are saying the same thing.

#9

+1