EDHEC has adapted the methodology behind its existing Alternative Indexes to create five new investable indices - the EDHEC Investable Hedge Fund Indices.
The aim is to offer a set of investment vehicles while maintaining a focus on representativity. These indices, which are made up of a limited number of single hedge funds, can be thought of as the best possible one-dimensional summaries of information conveyed by a variety of hedge funds following a given style, in the sense of the largest fraction of the variance explained. Since they are both representative and investable, these indices are ideal tools for constructing asset allocation benchmarks.
The EDHEC Investable Hedge Fund Indices are invested in funds that are managed on the Lyxor AM (Société Générale group) managed accounts platform, which allows them to benefit from a secure and liquid investment context. Their performances will be calculated every week and their liquidity is also weekly.
The EDHEC Investable Hedge Fund Indices are not funds of funds and as a result are not marketed as such. They are allocation supports that allow asset management firms or institutional investors to implement value creation strategies based on dynamic allocation between the hedge fund styles.
Up until now, the stumbling block for implementing an effective allocation policy in the alternative universe has been the lack of investment supports that are liquid and genuinely representative of the risks of each strategy. To date, five EDHEC Investable Hedge Fund Indices have been created, covering five popular strategies, namely, Convertible Arbitrage, Equity Market Neutral, Long/Short Equity, CTA Global and Event Driven. These strategies not only represent the bulk of assets managed in the alternative arena (i.e. 65 per cent), but they also deliver betas that are representative of the hedge fund universe.
The first example of this new form of value creation is the Equity Diversifier and Bond Diversifier mutual funds managed by Lyxor AM. These funds of funds, which will be marketed in France from 11 May, are based on an optimal combination of EDHEC Investable Hedge Fund Indices with a view to diversifying equity or bond portfolios.
Other funds of funds that are based on EDHEC Investable Hedge Fund Indices are currently being prepared. Through EDHEC Investment Research, its asset allocation consulting activity, EDHEC supports asset management firms in the design and use of the dynamic multi-style, multi-class allocation method that is one of the EDHEC Risk and Asset Management Research Centre's major research areas.
European asset management firms are expected to create more than five alternative funds of funds whose performance will be based on allocation between EDHEC Investable Hedge Fund Indices, in September 2005.