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Hedge Fund Indices – To Revise or Not To Revise

As we probably have told you countless times, we are providing a range of specialized Hedge Fund indices. These are useful for investors that need to benchmark managers. And for managers to gauge how they are doing compared to their average competitor. Some of our indices go back to the inception of the database, while others are more recent innovations.

The construction method is the same across all of our indices, we use our own proprietary classification methodology, to sort through a wide variety of strategies. We slice and dice the numbers to arrive at a set of interesting observations. What is particularly unique about the way we construct the indices, is that they are forgiving and allow managers to be re-included if they restart reporting.

If a manager temporarily stops submitting data, and then at some later point restarts reporting, we update our historical records. While this prevents the indices from being investable, the flipside is that they may be somewhat more representative than indices that do not revise historical data. But, we do not allow managers to backfill data as some indices out there do.

A proprietary feature in the datasets that we maintain is that they are time-stamped and we can track the evolution of a particular manager over time. In this case, we take a closer look at the NilssonHedge CTA index, our broadest representation of Managed Futures performance. In the chart above we plot how the cumulative returns looked at various dates.

A feature that is part of the design principles of the NilssonHedge Indices is that we are fully transparent about the constituents of each index, and also why they are included. Not only on a snapshot basis but since the inception of the index. This allows you to recreate the performance of the index and verify that our calculations are reasonable.

The indices are reconstituted annually, and managers are included as long as they are offering timely return reporting.

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Due to a change in how we stored and distributed the index data, we only started tracking our Index as of mid-2021 (a shoemaker's son always goes barefoot). We note that in general, looking at the data over time, there are relatively few revisions and they tend to take be neutral in terms of performance.

The other interpretation is that liquid strategies seldom have a need to substantially revise their numbers.

We take a look at our competitor's data and find that there have been substantial deviations over time. Here there is something else going on. Something was substantially altered in the performance data of the underlying strategies.

To their credit, there is only one major revision over the last five years, indicating that either a manager was excluded, or that a manager revised their track record substantially. The devil is in the detail, but Hedge Fund indices are hardly static and may change substantially over time.

We do not guarantee that this cannot happen to our indices, but we would at least be able to transparently point to which managers revised their numbers.

Thus, it is not only important to understand how a particular manager works and the individual drawbacks of a specific strategy. It is also important to understand how the benchmarks you are using are constructed, and how they may change and update over time. There are substantial revisions for some indices. Our databases allow for these types of research and may be a valuable tool when you are doing manager research.

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