|Why the new Mizuho-Eurekahedge Indices|
The Eurekahedge Indices have been in operation for almost a decade and have provided a successful barometer of the health of the hedge fund industry for investors globally. The methodology of the Eurekahedge equal weighted indices is purely designed to reflect the performance of as many funds as possible irrespective of size and also to adjust historical index values to cover newly reporting funds with historical track records. So while this gives a more accurately reflection of history in the hedge fund industry it makes it harder to use the underlying constituents for more practical investment purposes. Hence, in conjunction with our parent company, Mizuho Bank, we launched a new suite of indices with a far more rigid methodology incorporating asset-weighting and currency movements amongst other things.
|Monthly asset weighting|
An index weighted by each asset's market price is called a weighted-average index. In traditional finance theory, asset weighted portfolios are regarded as a more representative market portfolio while a simple average returns portfolio takes an active position for the representative market portfolio. The Mizuho-Eurekahedge Indices adopt this concept of financial theory to generate the asset weighted indices that are rebalanced monthly.
AUM and returns are dominated in US dollars
We rebalance a selection of the constituents quarterly based on their AUM and track record.
The returns reported in the database and used for Eurekahedge indices are monthly returns provided by hedge funds on a monthly basis. The returns are measured in terms of the gain/loss of the total portfolio values by performance and are net of all fees. The returns of funds that are not denominated in USD are converted to USD returns from base currency and then included in the index.
Who decides how funds are categorised
Funds are categorised primarily based on their investment regions and style. We do not include duplicate fund in the indices.
Requirements on AUM
A fund must have US$50 million in AUM to be included in the index – once a fund qualifies it will remain in the index unless its assets fall below US$5 million. For Mizuho-Eurekahedge Asset Weighted Top 100 and Top 300 Indices, the constituents are ranked by AUM and consist of the largest 100 or 300 AUM funds irrespective of regional investment mandate or style.
Minimum 12-month track record of performance and as-of-date updated AUM.
Dead, closed and new funds
We include a hedge fund's returns in the index only after its registration on the database. As such, the returns of a fund before it registered on the database are not included in our indices. This process should minimise back-fill bias and the resulting distortion of index returns.
If a hedge fund is liquidated at any time after being included in one of the indices, we do not exclude its past returns from the index. The performance data of such funds is preserved in the obsolete fund database. This is to minimise survivorship bias which can result in distorted index returns.
The Mizuho-Eurekahedge indices include all hedge funds regardless of their base currency. This enables the indices to reflect the hedge fund activity globally, rather than being dominated by just one region due to currency considerations. The Mizuho-Eurekahedge Index and its sub-indices convert all local fund currency returns to USD returns.
We have also developed ground breaking currency-hedged indices for three main currencies: USD, EUR, and JPY.
Latest index values
The index values for a month will be finalised 90 days after that month. This will ensure that the maximum number of hedge fund returns are captured by the index. For example as at 17 October 2011 the returns for July, August and September are still floating as estimated NAVs are converted to real NAVs by fund managers and small revisions are made. As at 1 November 2011 July’s index value will be fixed for ever and August, September and October will 'float'.
The following regional mandates have been applied to the main Mizuho-Eurekahedge Index in order to create regional subsidiaries.
Asia Pacific ex-Japan
The following strategic mandates have been applied to the main Mizuho-Eurekahedge Index in order to create strategic subsidiaries such as the Mizuho-Eurekahedge Asia/Pacific ex Japan All Strategies Index.
Involves the purchase of an asset followed by immediate resale, exploiting pricing inefficiencies in a variety of situations in similar or different markets. It is usually regarded to have low risk, but this may differ depending on the circumstances. The most basic form of arbitrage is triangle arbitrage, where an asset is being sold at two different prices at different markets. Such gaps are often closed off almost instantly. Merger arbitrage takes place following M&A announcements as funds may purchase stocks of the target company and short the stocks of the acquiring company. Capital structure arbitrage involves taking advantage of pricing anomalies among different securities issued by the same or related firm. For example, a fund might go long on a high yield bond and short the stock of the company. Given the nature of opportunities pursued, returns tend to be market neutral.
Invests in commodity futures, options and forex contracts either directly or through a Commodity Trading Advisor who is registered with the Commodities Futures Trading Commission.
Invests in the debt of companies that are sick, bankrupt or in the course of a turnaround at deep discounts. Given the nature of these securities, there is selling pressure in the market as many of the institutional investors cannot own below investment grade securities. This results in lower demand, coupled with the negative publicity of a bankruptcy filing, leading to an undervaluation which this strategy is trying to capitalise on.
Exploits opportunities in specific situations, such as mergers, public offerings, leveraged buyouts or hostile takeovers, and is generally unaffected by the movements in the market or trends. They need not necessarily be limited to any particular investment style or asset class. One example of an event driven arbitrage strategy is merger arbitrage, distressed debt, or more generally speaking, distressed securities.
Invests in fixed income securities (long, short or both) and/or fixed income arbitrage (exploiting pricing anomalies in similar fixed income securities) opportunities, usually along with the use of leverage. For this strategy, they may focus on interest rate swaps, forward yield curves or mortgage-backed securities.
Attempts to hedge out market risk by investing on the long (buy then sell as prices rise) as well as short (borrow, sell and buy as prices go down, and settle the loan) side of the equity markets. The fund’s net exposure to the markets is reduced if not completely hedged out, owing to the short-selling. Managers shift from stocks of small values to that of large ones, resulting in a tilt in the net long or short position to gain returns. Absolute returns are accentuated by such use of leverage and may also make use of options and futures. Note that this strategy is different from a true equity market neutral strategy. The key difference lies in the fact that the manager is betting that one stock will do better than the other relatively, regardless of the general market movement.
A top-down strategy that tracks and profits from global macro-economic directional shifts or changes in government policies. This, in turn, affects foreign currencies/economies, interest rates and commodities. Managers using this strategy are usually involved in all kinds of markets, such as equities, bonds, etc. The use of leverage (and derivatives, in particular) accentuates the impact of market movements on fund performance.
Adds a further layer of diversification to asset allocations (as opposed to merely diversifying across asset classes) by investing in more than one of the strategies described here. To loosely analogise, a multi-strategy fund would be the single-manager fund equivalent of a fund of hedge funds. The volatility for this strategy is considered to be variable.
This is an overarching classification and encompasses all strategies that use pair-trading, leverage in a variety of securities and aim to hedge out market risk. For instance, fixed income arbitrage, capital structure arbitrage and long/short equities are all technically relative value strategies.
The TOP100 and TOP300 indices are a subset of the main index whereby we only take the top 100 or 300 funds by assets. The indices are rebalanced quarterly and the constituents for the quarter are determined by the preceding month’s AUM ranking. For example in January 2012 the constituent funds will be decided by the Top AUMs from December 2011. The constituents are then fixed for the next 3 months (January, February and March 2012).
In addition we have altered the rebalancing of the TOP Indices from monthly to quarterly. This greatly reduces the turnover of the funds in the index but has a negligible effect on performance.
In order to enter the index the fund must have at least US$50m however in order to leave the index a fund must fall below US$5m. This keeps turnover and hence transaction/liquidity related costs down.
Why asset-weighted indices?
There are 7 key traits to these new indices:
For more information on Eurekahedge indices, please contact us on +1 212 706 7020 (US office) or +65 6212 0925 (Singapore office), or email us at email@example.com.