S&P Publishes the Whats, Whys of its Hedge Fund Index

September 17, 2002 (PLANSPONSOR.com) - Standard and Poor's has unveiled the methodology, structure, and components of its new hedge fund index.

Forty hedge funds make up the S&P Hedge Fund Index, announced earlier this year.  The index, which is expected to launch soon, is divided into three “style” sub-indices:

  • Arbitrage
  • Event-Driven
  • Directional/Tactical.

Sub-Index Composition

Standard and Poor’s notes that the Arbitrage sub-index includes Equity Market Neutral, Fixed Income Arbitrage, and Convertible Arbitrage strategies.  The Event-Driven sub-index includes Merger Arbitrage, Distressed and Special Situations strategies, while the Directional/Tactical sub-index includes Long/Short Equity, Managed Futures, and Macro strategies.

The index is equal weighted to ensure a well-rounded representation of hedge fund investment approaches and to avoid over-representation of strategies that are in favor at the time, according to Standard and Poor’s.

Screen Shot

The hedge funds included in the S&P Hedge Fund Index have been selected by Standard & Poor’s Index Committee following what the firm describes as a “rigorous due diligence process” conducted along with hedge fund consultant, Albourne Partners Ltd. 

Funds were screened to ensure that they:

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

S&P also applied other criteria for index inclusion, including level of assets under management, length of time the fund has been in existence, tenure of the fund manager and willingness to grant daily transparency for daily index calculation. 

The components of the index are at  this S&P site . Standard & Poor’s has also published a white paper that details the structure and methodology of the index, as well as pro forma index history and industry correlations. For the full report, please see this site .