Hedge fund indices
UCITS Hedge will publish weekly indices based on the underlying UCITS-compliant hedge fund universe, as contained in the UCITS Hedge database. The indices will be published on www.ucitshedgefunds.com, with monthly series published in The Hedge Fund Journal. The index series, as displayed in Table 1, will include a master index (“UCITS Hedge Index”), strategy indices, and in some cases, sub-strategy indices.
The indices will break down into two distinct series, namely “equal weighted” and “AUM-weighted” indices. All indices will be published under both criteria.
The UCITS Hedge AUM-Weighted Indices will reflect the performance of the entire UCITS hedge fund universe (and sub-categories thereof broken down by strategy) as defined by the UCITS Hedge Database.
The UCITS Hedge Equal Weighted Indices will reflect the full spectrum of return opportunities.
Universe
To be included as a component in the UCITS Hedge Indices, a hedge fund must be:
• UCITS III compliant;
• Registered on the UCITS Hedge Database and reporting to it regularly;
• Independently valued, as requested by the legislation.
There are no minimum assets under management or published track record criteria governing inclusion as an index component. In addition, a fund must possess an absolute return mandate defined as follows:
The fund manager should not be constrained in his mandate by any benchmark in terms of security selection or tracking error. A return target benchmark is acceptable. For example, in the case of a fund where the objective is to produce the S&P 500 return with half of its volatility, this would not be interpreted as a benchmark for the purposes of index inclusion. The index managers would regard this as an objective, not a constraint. Having an absolute return benchmark, such as the HFR Fund of Funds Index or DJ CS Tremont Hedge Fund Index or specific hedge strategy indices, would be the acceptable exception to the rule.
Hurdle rates will not be considered as a benchmark, as their sole purpose is to aid with the calculation of fees.
A fund with an absolute mandate as defined here will also have no minimum exposure level – i.e. the investment manager must not be constrained to invest; he should be able to sit on cash. In the case of systematic funds such as CTAs, the computer model is considered to be the “manager”. Under such circumstances, the model being used must have the theoretical ability not to invest, and cannot be constrained to any benchmark.
Distinction between absolute return and hedge funds
Because of the nature of the UCITS hedge fund universe, a distinction needs to be made between a pure hedge fund strategy and an absolute return strategy. This will ensure that the indices, as published, accurately reflect the performance of UCITS-qualifying hedge funds only.
For these purposes, an absolute return fund is defined as a fund that can only sell short using an index derivative for purposes of lowering its net exposure, but cannot run a net short book, or short individual securities or use derivatives linked to individual securities. In other words, a hedge fund can either/both sell short individual securities (or linked derivatives) or/and run a net-short book.
Using single stock-based CFDs to take a downside bet, buying single stock put options or selling single stock call options are equivalent to selling short the actual stock for the purpose of analysing whether a fund can short individual securities or not.
Currency: Given that the euro is the most widely used base currency for the UCITS hedge funds universe, the indices will use the euro as their base currency as well. The performance of the euro class for each fund will be used as the basis for index calculation. For those funds using euro as their secondary currency, the index will still refer to the euro price, even if this is not the primary currency.
If a fund has no euro class whatsoever, then the base currency returns will be adjusted for euro hedging using the differential in interest rates between the base currency and the euro as per BBA Libor 1 week.
Weighting: For indices weighted by assets under management (AUM), the AUM for each fund will be calculated as the sum of all share classes, including institutional, retail, accumulating, distributing and in the different currencies available. The AUM for each currency class will be converted to euro at the official exchange rate prevailing at the beginning of the period under calculation.
However, the AUM will not include offshore or US onshore funds or any other managed accounts structures. Only funds authorised for distribution as UCITS will be included.
Frequency: The indices will be collated every week on a Friday from the close of US derivatives markets. The cut off point will be 19.00 EST. Upon NAV publication by fund administrators and calculation of the indices by UCITS Hedge, the indices will be published on the subsequent Tuesday.
Valuation of indices: The inception date for the indices is 1 January 2010. All indices will be published with an initial starting value of 100. Any future additions to the range of indices will start with a value of 100, and will be launched once the index committee determines there are enough funds reporting to the database to make the index relevant.
Calculation formulae
The equally weighted indices are calculated as per:
The AUM weighted indices are calculated as per:
Where:
is the index value at time t
is the number of underlying funds in the index at time t
is the Net Asset Value of a Fund f at time t
is the Assets Under Management of a Fund f at time t
Data integrity: UCITS Hedge will seek to obtain all the required UCITS filings in order to establish whether a hedge fund should be included in the database. The final decision will lie with the managers of the UCITS Hedge database and indices.
Changes to historical data will be investigated and updated, but adjustments affecting the index values will only occur on a forwards basis to avoid backfill bias. The same will apply to funds added to the database that already have a historical track record. While the fund’s historical NAV will be made available, this will only impact index performance from the date at which the fund begins regularly reporting to the database.
Removal from the indices: Funds that cease operations, or cease to report NAVs and AUM levels to UCITS Hedge will be removed from the index. Funds that fail to report for more than two weeks will be removed from the index. In the meantime, their performance will be substituted with either the average reported returns for member funds in the same sector, or a materially similar proxy hedge fund, if one is available. Liquidating hedge funds will not be removed from the index until the liquidation is final, regardless of failure to meet reporting requirements.
