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Hedge Fund Index Rules and Construction

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  • David Xiao

Abstract

A Hedge Fund Index is very useful for tracking the performance of hedge fund investments, especially the timing of fund redemption. This paper presents a methodology for constructing a hedge fund index that is more like a quantitative fund of fund, rather than a weighted sum of a number of early replicable market indices, which are re-balanced periodically. The constructed index allows hedge funds to directly hedge their exposures to index-linked products. That is important given that hedge funds are an asset class with reduced transparency, and the returns are traditionally difficult to replicate using liquid instruments.

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  • David Xiao, 2024. "Hedge Fund Index Rules and Construction," Papers 2403.15925, arXiv.org.
    • Handle: RePEc:arx:papers:2403.15925
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    References listed on IDEAS

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    1. Stephen G. Dimmock & William C. Gerken, 2016. "Regulatory Oversight and Return Misreporting by Hedge Funds," Review of Finance, European Finance Association, vol. 20(2), pages 795-821.
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    3. Yigit Atilgan & Turan G. Bali & K. Ozgur Demirtas, 2013. "The performance of hedge fund indices," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 13(3), pages 30-52, September.
    4. Ardia, David & Boudt, Kris, 2018. "The peer performance ratios of hedge funds," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 351-368.
    5. Aragon, George O. & Nanda, Vikram, 2017. "Strategic Delays and Clustering in Hedge Fund Reported Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(1), pages 1-35, February.
    6. Bastian von Beschwitz & Sandro Lunghi & Daniel Schmidt, 2022. "Fundamental Arbitrage under the Microscope: Evidence from Detailed Hedge Fund Transaction Data [Leverage, moral hazard, and liquidity]," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 12(1), pages 199-242.
    7. Dimitrios Stafylas & Keith Anderson & Moshfique Uddin, 2018. "Hedge fund index-engineering methodologies: a comparison and demonstration," Applied Economics, Taylor & Francis Journals, vol. 50(6), pages 596-612, February.
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