CSFB-Tremont's president, Oliver Schupp, discusses investable hedge fund indices.
CSFB-Tremont recently launched sector-focused investable hedge fund indices. How are these structured?
Schupp: We'e created investable sub indicies for each of the 10 strategies represented in our overall hedge fund index. In structuring the investable sub indicies, we aim to represent 70% of the investable hedge fund universe including the largest funds by assets under management. Each sub index has a minimum or 10 and maximum of 25 funds. Our selection process is line with our traditional practise of being very much rules based, minimising subjectivity.
What was the rationale for launching sector-focused investable hedge indices? Was it in response to investor demand?
When we launched our investable hedge fund index a year ago, the intention was always to make the natural progression and launch sector-specific hedge fund indices over time. However, we've seen strong demand from institutional investors with large portfolios who want to invest in sector-specific strategies over a certain period of time.
Will you be giving advise to clients on how to tactically allocate their investments between the various hedge fund strategies?
Yes, our in-house experts will be available to discuss the market environment with clients and which strategies may be able to exploit this best. But the final decision will remain with the client.
For our high-net worth and private clients, we think they would be more interested in baskets of indices that reflect certain characteristics. For instance, we might create an aggressive basket, a market-neutral basket etc.
What type of investors are interested in investable indices?
Currently, almost 60% of our assets are from Asia, of which 50% are from non-Japan Asia, with a strong lead from Hong Kong, Singapore and Taiwan. We're also seeing more interest now from Japan, largely from corporate banks and pension funds. Recently we saw our first investment from Korea.
The remainder 40% is largely from Europe. Switzerland and Germany are the major markets for us. We have publicly distributed products listed on the stock exchange in both of these countries. We're also distributing this product to high-net worth clients through our private banking network, which is a very natural distribution channel for us. The US makes up a small part of our business so far. This is partly because many institutions are already invested in single-manager hedge funds directly and party because the index is based on offshore hedge funds, which precludes us from selling to US taxable persons unless we structure it as a warrant or principal protected note.
Are index products more attractive to new hedge fund investors? Is that why Asian investors make up a larger part of your investor base?
While it's true that hedge fund indices are ideal for investors entering the hedge fund market for the first time, I'd say the Asian bias among our investors reflects where our distribution network is the strongest. We've only been marketing this product for 10 months so it's early days yet. Hedge fund indices will take a few years to gain acceptance at all levels.
Why would an investor choose a hedge fund index over a fund of hedge funds?
If you believe your fund of fund manager can offer you a better performance after costs, including a double layer of performance fees, then you should probably choose a fund of hedge funds. But realistically, can a fund of hedge fund manager consistently do this? If you make a connection to the equity world, there is some evidence that the majority of mutual funds under perform their benchmark from year to year.
What differentiates CSFB-Tremont's index from other investable indicies?
What really sets us apart is our ability to include some of the largest hedge fund managers in the world in our investable index. There are probably about 10-15 large funds that are generally closed, but which we are able to access because of our relationships. If you look at each sector of our investable index, we aim to include the largest six funds. When we don't have the largest funds it's because they have typically been closed for several years.
We also differentiate ourselves from competitors by a very straight forward and understandable method for including funds in our index. Some of our competitors look at correlations or statistical analysis when deciding which funds to include. We don't believe such methods would hold up under academic scrutiny, especially as the tests are generally designed for distributions of higher frequency data.
Why would a hedge fund manager find it advantageous to be included in an investable index?
Hedge fund managers find investments for hedge fund indices more permanent and stable than fund of hedge funds. Our investments are based on asset allocation and are not that performance sensitive. Performance plays no role in fund selection, although obviously a prolonged period of bad performance will cause assets to dwindle and the fund to come out of the index.
Fund of hedge funds tend to be more hot money and driven by short-term performance.
Has the relatively poor performance from the hedge fund industry in recent months affected asset raising for the investable index?
We did have a quiet period over the summer, which can be attributed to the disappointing performance from hedge funds during the spring, although the summer months are traditionally more quiet.
However, I remain positive on asset growth. Most investors see hedge fund investment as a strategic long-term allocation and are not motivated by short-term performance. While hedge fund performance this year may have been disappointing so far, it is certainly not a disaster. The CSFB-Tremont investable index is currently up 1% net through September. Most equity markets are slightly negative over this period.