Hedge -Fund Benchmarks: Information Content and Biases
- Topics:
- Commercial Lending
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Overview: The article discusses the information content and potential measurement biases in hedge-fund benchmarks. Hedge-fund indexes built from databases of individual hedge funds inherit the measurement biases in the databases. In addition, broad-based indexes mask the diversity of individual hedge-fund return characteristics. Consequently, these indexes provide incomplete information to investors seeking diversification from traditional asset classes through the use of hedge funds. The approach to constructing hedge-fund benchmarks that are proposed is based on the simple idea that the most direct way to measure hedge-fund investors themselves – the funds of hedge funds (FOFs). In terms of measurement biases, returns of FOFs can deliver a cleaner estimate of the investment experience of hedge-fund investors than the traditional approach. In terms of risk characteristics, indexes of FOFs are more indicative of the demand side dynamics driven by hedge-fund investor’s preferences than are broad-based indexes. There fore indexes of FOFs can provide valuable information for assessing the hedge-fund industry’s extperience.
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Format: PDF | Size: 1,526KB | Date: Feb 2002 | Pages: 14
