An Index Is An Index Is An Index – Well, Not Really

February 19, 2001( — While it might be true that "a rose is a rose is a rose," the same doesn't necessarily hold true for hedge fund indexes. Morgan Stanley Capital International certainly doesn't think so.

The latest word on when to expect the new index from Morgan Stanley Capital is this summer. It will not initially be investable, although the option remains under consideration. Morgan Stanley Capital isn’t saying more than that its index will be “institutional-brand quality” and that it will be “different.”

The database for the new index will come from Financial Risk Management in London, which is Morgan Stanley Capital’s headquarters. Financial Risk Management, a unit of Standard & Poor’s, is an institutional asset manager investing in hedge funds.

Curious to see what all the fuss was about, took a look at the nine existing indexes. The following is what we found:

Altvest, New York , tracks 13 strategies from a database that allows managers to input their own data. Each fund is assigned to the category in which the largest percentage of its assets is invested. There are no performance criteria for inclusion in the index. Index results are based on reports from more than 1,400 hedge funds in a database of 1,800 funds. The index was launched last year, with data going back to 1993. Updated daily, it is one of the first of the indexes to report results from the previous month. Altvest is owned by InvestorForce and the website requires registration in order to gain access to the indexes.

Capital Markets, Norwalk, Conn., is based on 100 funds selected to be representative of 13 strategies, arranged in five clusters. EACM bases its results on the same funds from month to month, allowing no manager who had a bad month to avoid inclusion. Funds are assigned categories on the basis of how closely they match the strategy definitions. Names of the funds are not disclosed. The index is rebalanced annually. It was launched in 1996 with data going back to 1990. Capital Markets is owned by Evaluation Associates.

Credit Suisse First Boston/Tremont, New York , covers nine strategies and is based on 340 funds, representing $100 billion in invested capital, selected from a database of 2,600 funds. It is the only asset (capitalization) weighted hedge fund index. The CSFB/Tremont Index discloses its construction methods and identifies all the funds within it. CSFB/Tremont accepts only funds (not separate accounts) with a minimum of $10 million under management and an audited financial statement. The index was launched in 1999, with data going back to 1994. It incorporates the TASS+ database.

Hedge Fund Research, Chicago , includes 29 categories plus subtotals. The index is based on 1,100 funds drawn from a database of 1,700 funds. Funds of funds are not included in the composite index. Funds in the database represent $260 billion in assets. The index was launched in 1994 with data back to 1990. Funds are assigned to categories based on the descriptions in their offering memorandums.

A joint venture with Zurich Capital Markets created a separate investable index with fewer funds, but the agreement was dissolved in December. HFR continues to offer a daily investable index to its institutional investors., New York , covers 33 strategies arranged into three subtotals. Called the Tuna Indices, they are updated from a database of 1,800 hedge funds and funds of funds. The data goes back to 1979 and managers select their own categories. Registered users can sort funds in each index by criteria and is among the first to report results from the previous month. HedgeFund.Net is operated by Links Securities LLC, an NASD registered broker-dealer, and owned by Links Holdings and Capital Z Investments.

Hennessee Group, New York , reports 22 investment style categories. The indexes were created in 1987 and first published in 1992. Results are based on 450 funds, including 150 in which Hennessee clients are invested, from a database of 3,000 funds. Assets of $160 billion are represented in the index. Each reporting fund is placed in the category that reflects the manager’s core competency.

LJH Global Investments, Naples, Fla., tracks 14 strategies, each composed of 25 to 50 funds. It is the only index that presents performance exclusively in graph form. To be included, funds must have an audited statement and have passed some level of LJH due diligence. Funds are assigned to categories based on LJH’s screenings. The index is rebalanced quarterly or semiannually, depending upon the strategy. The website shows neither composite performance of all funds, nor definitions of strategies. For a fee, LJH will provide data on index components.

Managed Account Reports, New York, reports the performance of the median fund in each of 15 categories, 10 of which are combined into four submedians. A composite index is not available. The MAR database contains 1,300 funds and managers usually select their own categories. The firm’s website identifies the number of funds and assets in each category. MAR is primarily a publisher of newsletters, directories and conferences. It is owned by Metal Bulletin Plc.

Van Hedge Fund Advisors International, Nashville, Tenn., is derived from the performance of an average of more than 750 funds separated into U.S. and offshore funds covering 14 strategies and combined into a separate global index. There are no performance or size criteria and funds are assigned to categories based on their offering memorandums and interviews with the individual managers.

By Oliver R. Witte, Managing Editor,


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