Hidden Benefits of Equal Weighting: The Case for Hedge Fund Indices

35 Pages Posted: 29 Nov 2010 Last revised: 9 Dec 2011

See all articles by Akos Beleznay

Akos Beleznay

Quantitative Alternative Management, LLC

Michael Markov

Markov Processes International LLC

Alexey Panchekha

Markov Processes International LLC

Date Written: November 28, 2010

Abstract

In this paper we study statistical properties of equal-weighted indices of hedge funds. We find that aside from diversification benefits, 1/N naïve equal-weighting possesses some additional attractive relative performance properties. We show that subject to certain assumptions, such an index outperforms more than half of its constituencies and provides lower risk and better risk-adjusted performance characteristics than the majority of them as well. We find that similar properties hold for equities and, to a lesser degree, for mutual funds. We relate these properties to the skewness of cross-sectional distributions of hedge fund returns. We also briefly discuss efficient implementations of the equal-weighted indices of hedge funds.

Keywords: hedge funds, equal-weighted indices, hedeg fund indices, hedge fund replication

JEL Classification: G10, G11, G14, G20, G24

Suggested Citation

Beleznay, Akos and Markov, Michael and Panchekha, Alexey, Hidden Benefits of Equal Weighting: The Case for Hedge Fund Indices (November 28, 2010). Available at SSRN: https://ssrn.com/abstract=1716547 or http://dx.doi.org/10.2139/ssrn.1716547

Akos Beleznay

Quantitative Alternative Management, LLC ( email )

6075 Poplar Avenue
Suite 700
Memphis, TN 38119
United States

Michael Markov (Contact Author)

Markov Processes International LLC ( email )

25 Deforest Ave
Suite 102
Summit, NJ 07901
United States

HOME PAGE: http://www.markovprocesses.com

Alexey Panchekha

Markov Processes International LLC ( email )

25 Maple Street
Summit, NJ 07901
United States

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