An equal-weighted strategies index can be regarded as a special case of a global hedge fund index with static index weights. These static weights may eventually cause some shortcomings.
In contrast to global hedge fund indices where the different strategies may be asset weighted according to the market capitalization of assets in the hedge fund industry, the weightings of the strategies in an equal-weighted strategies index are not in accordance with the true representation of the different strategies in the hedge fund universe.
The static weightings of the individual strategies in the index may also lead to the problem that it becomes difficult to react to changing market conditions.
A global hedge fund index offers more dynamic possibilities to react to changes in the hedge fund market/peer group and to changes in the importance of different strategies represented in the hedge fund universe. The static weightings of an equal-weighted strategies index prohibit this adaptability and flexibility.
Besides its problems, an equal-weighted strategies index can also have positive side effects. In the case of an equal-weighted strategies index, there are no large strategy classes that dominate the index and that could cause a bias toward these strategies.
For example, the HFRX Equal Weighted Strategies Index is meant to be characterized by a more balanced diversification and a historically lower volatility. This results in an enhanced attractiveness of such indices for investors.
Another advantage concerns the heterogeneity of hedge funds. One important problem in the hedge fund industry is that, due to the large influence of the individual portfolio manager’s skills on hedge fund performance and due to manager specific investment strategies, even in the same strategy grouping, the hedge fund characteristics may be very different.
In this case, an asset weighting of the different strategies may be disadvantageous and may lead to new distortions. In such a case an equally weighted strategies scheme could be preferable.
|Equal Weighted Strategies Index (HFRX)|