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The Value-Added of Investable Hedge Fund Indices

Thomas Heidorn, Dieter G. Kaiser and Andre Voinea
The Journal of Wealth Management Winter 2010, 13 (3) 59-79; DOI: https://doi.org/10.3905/jwm.2010.13.3.059
Thomas Heidorn
is a professor of banking at the Frankfurt School of Finance and Management in Frankfurt am Main, Germany.
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  • For correspondence: t.heidorn@frankfurt-school.de
Dieter G. Kaiser
is a director of investment management at Feri Institutional Advisors in Bad Homburg, Germany.
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  • For correspondence: dieter.kaiser@feri.de
Andre Voinea
is a fixed income analyst at Nomura International plc in London, UK.
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  • For correspondence: andre.voinea@nomura.com
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Abstract

This article empirically investigates the risk and performance of three types of alternative beta products over the January 2002 to September 2009 time period: funds of hedge funds (FHFs), investable hedge fund indices (IHFIs), and hedge fund replication strategies (HFRS). The authors show that IHFIs are true alternative beta products with high correlations and beta to non-investable hedge fund indices. Their results further suggest that, in a best case scenario, IHFIs outperform FHFs and HFRS on a risk-adjusted basis. However, in the worst case scenario, IHFIs underperform both investments. If one takes the average of all IHFIs, one finds that they perform equally as well as FHFs. Hence, IHFIs constitute a solid alternative to FHF investments, while costing substantially less, and offering generally more transparency and liquidity. The authors propose that fee-sensitive investors especially should consider taking a core-satellite approach to their hedge fund portfolio, with the core represented by cheap passive hedge fund beta through IHFIs, and the satellite represented by more expensive and actively managed alpha-generating FHFs.

TOPICS: Real assets/alternative investments/private equity, mutual funds/passive investing/indexing, performance measurement

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The Journal of Wealth Management: 13 (3)
The Journal of Wealth Management
Vol. 13, Issue 3
Winter 2010
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The Value-Added of Investable Hedge Fund Indices
Thomas Heidorn, Dieter G. Kaiser, Andre Voinea
The Journal of Wealth Management Oct 2010, 13 (3) 59-79; DOI: 10.3905/jwm.2010.13.3.059

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The Value-Added of Investable Hedge Fund Indices
Thomas Heidorn, Dieter G. Kaiser, Andre Voinea
The Journal of Wealth Management Oct 2010, 13 (3) 59-79; DOI: 10.3905/jwm.2010.13.3.059
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    • DEVELOPMENT OF HEDGE FUND INDICES
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