So I’m curious it seems like the HFRI FOF index is the standard for the industry, but why is the CFSB / Tremont Hedge used?
The biggest hedge fund databases are CSFB/Tremont TASS, Hedge Fund Report (HFR), Center for Internatinal Securities and Derivatives Markets (CISDM), and Morgan Stanley Capital International (MSCI). I’m sure each database has its own FOF index. I would use several benchmarks.
Each FoF index is made up of different constituents and so will track differently. Some are better than others for differing reasons and sometimes one just prefers another index over another because of name recognition. I agree, one should use a combination of FoF indices to get an idea, but none are even close to perfect.
Well this particular client prefers the HFRI because it’s easier to beat obv. But doesn’t the CSFB just include all hedge funds, and since it’s investable why wouldn’t this be the best option?
I don’t believe that CSFB has a FoF index. The index is now DJ-CS Hedge Fund Index but they do not have a sub-category for FoFs. Using the general Hedge Fund index ignores the added layer of fees. Also diversified FoFs tend to pursue a lower vol mandate so you’ll see a beta less than 1 for a FoF index compared to a general index. The investable CSFB indexes suffer from a number of biases, mainly the manager has to agree to accept money through their “index” funds. Most sucessful managers won’t do that. Fits the SAMURAI criteria better, but are you truly benching to an appropriate peer group?
Well The.Unit.Root, the question remains why invest in a FOF if it can’t beat the investable alternative of DJCS/ CSFB Tremont. Volatility aside, numbers are what they are.
Many invest in FoFs because they dont have the knowledge, the ability / resources to monitor and they don’t have to do the due diligence on the funds. FoF’s should not be compared to investing in a single strategy fund as regardless of fees the other purpose is for diversification… I bet you would have loved to have invested 100% in Madoff because his returns were unbeatable vs say a 4% position in a FoF in Madoff; or should I say a 0% as most did their due diligence and knew something wasn’t right.
CFSB is a compilation of many hedge funds, so essentially a fund of funds. Not sure what you are trying to say
You can always benchmark your HF portfolio using cash plus an increment (e.g. LIBOR + 500bps depending on the strategy) that way you avoid the drawbacks and bias of HF index data.
Yes MissCleo it is a compilation of many funds, I know, thank you for stating the obvious. What I’m trying to say is if its asset weighted the larger managers who decide to report their numbers will have a greater effect on the returns or if its equal weighted then it might give you a better sense of returns, but is still not a good match for a true fund of funds that strategically weights their investments and might favor certain strategies over others. So you can’t compare a compilation of HFs to FoFs as its apples to oranges; at least a FoF composite is more Apples to Apples but might be a Granny Smith to a Red Delicious.
SouthFlorida, good point many do benchmark to a Libor + hurdle, but some clients just demand to be compared to an index.
I’m still very confused bigwilly, so by this logic all large cap equity managers should be benchmarked against other LC managers not the S&P 500? That makes no sense
Don’t be quick to assume that a hedge fund index is investable. Most indices backfill data and remove failed funds, making the results very much *not* attainable.
MissCleo, just as others have said, you should be very cautious when you use hedge fund indices. For example, they are subject to backfill, incubation and survivorship biases. I’m currently writing a paper for Fama’s research class on performance persistence of CTAs (hedge funds in managed futures space). Results are strikingly different when biases are accounted for appropriately.
MissCleo. The Long-only space is MUCH different than the hedge fund world. And using your example, yes many LC managers are benchmarked against other LC managers using say Morninstar Universes, however their “Benchmark” is the S&P 500 b/c that is the mandate. The HF mandate is not outperform the S&P, its usually Libor + 4-500bps or more depending on your volatility target. As such, HF’s dont really have a great benchmark that can be easily tied to, and so people tend to look at HF databases/indices to see how their manager is doing compared to others. BUT due to many differences in styles, targets, mandates etc you can’t compare them across the board, plus all the other issues with the indices as noted above. An EM L/S manager cannot be compared to a EH L/S database that is comprised of mainly US & European focused L/S managers; two totally different mandates. Yes both are “equities” but one is targeting Emerging markets while the majority are targeting Developed markets. I know this may not be coming out clear, but I’m tired and one can spend forever talking about this.
I haven’t looked at it recently, but I am quite sure the investable products from CSFB underperform “standard” HF indexes; reason being that sucessful managers don’t need to raise money through these products
Well I looked into the investable CSDJ Tremont Blue Chip which invests in the 60 largest HFs, and this index has beaten the manager in question for the past 3 years. It looks like the CSDJ Tremont Hedge Fund may not be investable but the Blue Chip definitely is.
The blue chip is investable, the CSDJ Tremont HF index is not. Over longer time frames the blue chip has underperformed the standard…again probably because of access bias. Investable indexes are competitors to FoFs. Picking a benchmark is just as much art as science. As long as manager and investor come to agreement on one that is good. There’s no rule that you have to have just one either. Sounds like it may be time to fire the manager.
Gotcha, I think it is time, how would one go about investing in the CSDJ blue chip, assuming the numbers are roughly the same.
We haven’t invested in it before, but I believe just contact CS…I am pretty sure the investable product is set-up as an LP managed by CS that invests in separate accounts. I’d be curious what you find out, if you wouldn’t mind reporting back?