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Funds of Hedge Funds or Investible Hedge Funds Indices: Which is the Best Investment Tool?
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DANIEL P.J. CAPOCCI
HEC - Université de Liège; KBL European Private Bankers; Luxembourg School of Finance; Edhec Risk and Management Research Center
DAVID C. D. CAPOCCI
University of Edinburgh - Management School, Department of Finance
STOCK EXCHANGES, IPO'S AND MUTUAL FUNDS, pp. 137-158, Nova Science Publisher, New York, 2005
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Abstract:
Hedge funds are becoming available to a broader spectrum of investors through funds of hedge funds and investible hedge funds indices. There is no formal official definition of the strategies applied but each database providers defines its own strategies, which can count as much as 20 different strategies. This study aims at analysing hedge fund strategies and determining so many different hedge fund strategies that exists by analysing into details the correlation patterns that exists between theses strategies. This study proves that investible hedge funds indices segregated per strategy are strongly correlated. We have also determined that the correlation between investible hedge funds indices is much higher than the average correlation between the individual funds of each hedge fund strategy. The aggregation of individual funds into indices diversifies accordingly the risk but leads also to the loss of one of the major advantage of hedge funds, which is their weak correlation. Given that hedge funds indices are constructed on a quantitative basis, a fund of hedge funds is the only vehicle that allows a trade-off between the number of funds to include into a portfolio in order to reduce the risk inherent to hedge funds investments while keeping the correlation at a low level. As long as the fund of hedge funds double-fee structure does not impact its performance and considering that the fund manager structure its investment in such a way to keep a low degree of correlation between the fund of hedge funds and traditional financial assets, such investment represents the best alternative for a traditional investor to invest in hedge funds and improve its risk-return profile.
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Keywords: Hedge funds, funds of funds, investible indices, performance, comparison, correlaiton, correlation coefficient, risk, return, traditional financial assets, alternative investments, risk-return profile
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JEL Classifications: G2, G11, G15
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Accepted Paper Series
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Contact Information for
DANIEL
P.J.
CAPOCCI
(Contact Author)
Email address for DANIEL
P.J.
CAPOCCI
HEC - Université de Liège
Bld du Rectorat 7 Bat. B31
Liege
4000
Belgium
+32/87784221 (Phone)
+32/87787140 (Fax)
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Email address for DANIEL
P.J.
CAPOCCI
KBL European Private Bankers
2, Boulevard E. Servais
Luxembourg
2960
Luxembourg
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Email address for DANIEL
P.J.
CAPOCCI
Luxembourg School of Finance
Luxembourg
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Email address for DANIEL
P.J.
CAPOCCI
Edhec Risk and Management Research Center
France
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Contact Information for
DAVID
C. D.
CAPOCCI
Email address for DAVID
C. D.
CAPOCCI
University of Edinburgh - Management School, Department of Finance
University of Edinburgh
7 Bistro Square
Edinburgh
EH8 9AL
United Kingdom
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