Chicago Board Options Exchange (CBOE) has published a white paper that analyses the use of benchmarks, such as those utilised by the CBOE Eurekahedge Volatility Indexes, to measure the effectiveness of volatility-based hedge funds in diversified portfolios.
In the paper to be presented at the 32nd annual CBOE Risk Management Conference (RMC) US in Bonita Springs, Florida, Christopher DeMeo, founding partner of Nu Paradigm Investment Partners LLC, notes that unlike other volatility-based hedge fund indexes, the new CBOE Eurekahedge Volatility Indexes differentiate funds by specific investment goals. Volatility strategies are distinct and non-homogeneous, making it critical to segregate them into categories to effectively analyse and properly benchmark performance.
Before these new indexes had been introduced, “Lack of consistent methodology and construction (had) complicated the due diligence process by making it difficult for investors to gauge how a manager performed relative to a truly representative index,” DeMeo says. The CBOE Eurekahedge Volatility Indexes delineate the source of returns in volatility-based investments, making it easier to benchmark hedge funds’ performance.”
The CBOE Eurekahedge Volatility Indexes track 77 unique strategies with combined assets under management of more than USD50 billion. Available on the CBOE and Eurekahedge websites since August 18, 2015, the indexes are equally weighted among their constituent funds and offered in four distinct buckets:
CBOE Eurekahedge Long Volatility Index, designed to provide a broad measure of the performance of underlying hedge fund managers who take a net long view on implied volatility with a goal of positive absolute return. 12 Constituents
CBOE Eurekahedge Short Volatility Index, designed to provide a broad measure of the performance of underlying hedge fund managers who take a net short view on implied volatility with a goal of positive absolute return. 16 Constituents
CBOE Eurekahedge Relative Value Volatility Index, designed to provide a broad measure of the performance of underlying hedge fund managers that trade relative value or opportunistic volatility strategies. 40 Constituents
CBOE Eurekahedge Tail Risk Index, designed to provide a broad measure of the performance of underlying hedge fund managers that specifically seek to achieve capital appreciation during periods of extreme market stress. 9 Constituents
