S&P Creates Hedge Index

March 19, 2002 (PLANSPONSOR.com) - Standard & Poor's hopes to give more investors confidence to invest in hedge funds with the launch of a new hedge fund index.

S&P announced plans to create the S&P Hedge Fund Index, aimed at providing a transparent benchmark of the hedge fund asset class. Some investors shy away from hedge fund holdings because of what many see as a lack of transparency.

The index will contain 40 funds divided into three sub-indices:

  • Arbitrage
  • Event Driven
  • Tactical.

These will, in turn, represent a total of nine specific strategies, weighted to ensure an appropriate representation of hedge fund investment approaches:

  • Macro
  • Equity Long/Short
  • Managed Futures
  • Special Situations
  • Merger Arbitrage
  • Distressed
  • Fixed Income Arbitrage
  • Convertible Arbitrage
  • Equity Market Neutral.

Selection Process

According to a media release from he company, potential index constituents are passed through a series of quantitative screening criteria to ensure that they conform to their stated strategy’s return and risk characteristics.

The funds must also agree to allow their valuations to be verified by a third party on a daily basis so that the index may be computed daily.

The funds must then pass a due diligence test to ensure that they:

  • are appropriately managed
  • adhere to their stated strategy or style
  • maintain all necessary risk controls and operational infrastructure.

Index values will be posted daily to the S&P Web site .

The index will be maintained by an index committee, which will meet regularly to ensure that inclusion criteria are being met and to implement necessary rebalancing.

S&P expects to announce the index composition and methodology, and launch the index by the third quarter of this year.