IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Hedge Fund Indices for Retail Investors: UCITS Eligible or not Eligible?

Listed author(s):
  • François-Serge Lhabitant

    (University of Lausanne, HEC and EDHEC Business School)

Registered author(s):

    Hedge fund indices have grown in numbers over the recent years and made their presence widespread through a number of providers. Assets linked to hedge fund indices currently exceed $12 billion, and the debate is now focusing on whether they should be considered as eligible assets for UCITS III funds. The consequences of a positive or negative answer from regulators are extremely important. In particular, a positive answer would imply that any non-approved offshore hedge fund can be indirectly distributed to any retail investors via an UCITS III vehicle, as long as this fund belongs to a hedge fund index. The problem is that existing hedge fund indices are fundamentally different from indices of traditional assets. In this paper, we review non-investable hedge fund indices, the various steps of their construction and the numerous performance biases that affect their returns. These biases are so important that in our view, the majority of existing hedge fund indices are not representative of the hedge fund universe – at best, they represent a biased sample of funds that have agreed to report to a database or an index provider. The case of the so-called investable hedge fund indices, which are often presented as an alternative to actively managed funds of hedge funds, is not much better. Our observations reveal that existing investable indices are less representative of the hedge fund universe and more biased than their non-investable cousins. They are, in essence, funds of hedge funds managed according to arbitrary rules and primarily designed to support high-fee tracking products. As a result of their numerous biases, lack of representativity and/or construction, our view is that existing hedge fund indices do not fulfil the three basic criteria required to become UCITS III eligible – sufficient diversification, ability to serve as an adequate benchmark and appropriate publication. We therefore suggest excluding them from the list of UCITS III eligible assets. Of course, in the future, this position could be revised once quality hedge fund indices are available and fulfil the aforementioned three basic criteria.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 06-14.

    in new window

    Length: 31 pages
    Date of creation: Jul 2006
    Handle: RePEc:chf:rpseri:rp0614
    Contact details of provider: Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp0614. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.