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Alternative Market Briefing

Other Voices: Aon Hewitt retirement and investment blog: Hedge fund indices as benchmarks

Friday, May 12, 2017

Executive Summary

Where clients are looking to benchmark hedge fund investments against a relevant market, or peer average, we recommend that clients use HFRI Fund Weighted Indices as opposed to indices from other providers or the newer Asset Weighted indices from HFRI.

In some situations it will be appropriate for clients to use other indices or benchmarking methods. The most common of these that we foresee is investments in CTA or trend-following managers, where HFRI do not publish an index specifically targeting this strategy. In this case we recommend clients use the SocGen CTA Trend Indices, the most widely known provider of indices for this strategy.

It is important to note there is no perfect hedge fund benchmark since none of the peer averages are both truly comprehensive and investable.

Introduction to Hedge Fund Indices as Benchmarks

When analysing hedge funds (unlike traditional investment strategies), there are not widely accepted security level benchmarks such as the MSCI All Countries World Index and JPMorgan Global Bond Indices. This, along with the fact that two hedge fund managers that call themselves Global Macro funds (for instance) may have vastly differing investment styles, makes benchmarking hedge funds notoriously tricky.

Over time, it has become conventional for hedge fund indices to take the form of peer group benchmarks. This means that they are composed of the returns of underlying hedge funds rather than individual......................

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