A Reply to the CESR Recommendations on the Eligibility of Hedge Fund Indices for Investment of UCITS
Authors : Noël Amenc Professor of Finance and Director of the EDHEC Risk and Asset Management Research Centre
Felix Goltz Senior Research Engineer at the EDHEC Risk and Asset Management Research Centre
In this paper, the authors examine the question of the eligibility of hedge fund indices as financial instruments for use by European investment funds.
Following recent advice given to the European Commission by the Committee of European Securities Regulators (CESR), it was decided to suspend such eligibility for a period of twelve months. The authors review this decision and comment on the problems identified by the CESR in relation to hedge fund indices. They go on to provide an analysis of these indices in consideration of three of the general criteria proposed by the CESR for financial indices: representativeness, transparency and diversification. The problems surrounding each criterion are addressed and it is shown that the reservations of the CESR in relation to hedge fund indices are not always well-founded. The problem of representativeness, for example, is a problem that is also observed in the case of equity style indices. With regard to diversification, the authors suggest that confusion between the terms benchmark' and index' leads to misguided criticism of a hedge fund index's inadequacy to fulfil this requirement. Finally, possible solutions such as managed account platforms for higher transparency are proposed to address the problems related to the three criteria.