HFN Indices Methodology and Description

Understand the methodology behind the HFN hedge fund indices with descriptions of specific indices by strategy, sector, region and more.

BACKGROUND

General Methodology

The HFN hedge fund indices are equal weighted averages of monthly returns of hedge funds, fund-of-funds and commodity/financial futures managed account composites (“Commodity Managed Account(s)”). The returns are reported by U.S. and international investment managers and are grouped together based on primary strategy classifications contained in the eVestment (HFN) database.

Monthly estimates are displayed between Day 1 and Day 45 after the close of a month once the greater of four funds or 10% of currently participating funds in such HFN Index have reported. The HFN Indices are re-calculated daily between Day 1 and Day 45 after which time the figures become permanent.

Once a fund’s performance is incorporated into an HFN Index it is not removed regardless of liquidation or a discontinuation of reporting by the fund to the eVestment (HFN) database.

Only hedge funds, Commodity Managed Accounts and funds of funds with a minimum of $1mm at the time they enter the eVestment hedge fund (HFN) database and two months of performance history are permitted to participate in the eVestment hedge fund (HFN) database and HFN Indices.

HFN currently publishes twenty-six strategy specific benchmarks, two UCITS III compliant hedge fund benchmarks, thirteen regional benchmarks, three fund of funds strategy specific benchmarks and four aggregate benchmarks.

DESCRIPTIONS OF HFN STRATEGY/SECTOR SPECIFIC INDICES (26)

HFN Asset Based Lending Index

This index includes funds that are primarily lenders and originate loans with an underlying asset of the borrower as collateral. Underlying asset types may vary widely, ranging from receivables to equipment and real estate.

HFN Convertible Arbitrage Index

This index includes funds that focus on obtaining returns with low or no correlation to equity or credit markets. Funds attempt to profit from pricing sensitivities between the convertible bond and equity of a company. A typical trade is to buy the convertible security and sell the underlying equity. Profit can be made from the change in the equity and its impact on the price of the convertible.

HFN CTA / Managed Futures Index

This index includes funds and managed account composites of Commodity Trading Advisors (CTAs) and firms domiciled outside of the U.S. that primarily trade in futures markets. CTAs and such firms generally trade futures on commodities, currencies, financials or interest rates and may be highly leveraged. Strategies tend to be quantitative in nature and trend following, but may also focus on the fundamentals of the underlying or passively track an index.

HFN Distressed Index

This index includes funds that purchase their preferred part of the capital structure of companies that are in or close to bankruptcy. The funds attempt to buy securities at a low price on the expectation that the company will come out of bankruptcy or recede from the brink of bankruptcy and that the securities will appreciate. Funds may take an active role in the bankruptcy proceedings to attempt to positively impact the value of their holdings.

HFN Emerging Markets Index

This index includes funds that primarily focus on the securities of governments or companies from emerging or developing countries. Exposures may be country or region specific.

HFN Energy Sector Index

This index includes funds that are primarily invested in securities with a focus on the energy sector.

HFN Event Driven Index

This index includes funds that take positions in securities with the expectation of specific events that may positively impact the valuation of their positions. Examples of specific events include acquisitions, reorganizations, spin-offs, debt exchanges and litigations.

HFN Finance Sector Index

This index includes funds that are primarily invested in securities within the finance sector, including banks, brokerages and insurance companies.

HFN Fixed Income (Non-Arbitrage) Index

This index includes funds that are invested in fixed income instruments and tend to be long-biased holders of securities. Funds may employ long/short strategies attempting to benefit from under or overvalued fixed income securities. These funds may be highly leveraged.

HFN Fixed Income Arbitrage Index

This index includes funds that attempt to exploit pricing inefficiencies between credit sensitive instruments which may include government or corporate debt, structured securities and their related derivatives. Types of arbitrage may include yield curve, swap spread, volatility and capital structure. These funds are often highly leveraged.

HFN Healthcare Sector Index

This index includes funds that are primarily invested in securities revolving around the healthcare sector, including biotechnology.

HFN Long Only Index

This index includes funds that trade a variety of financial instruments and use leverage, but do not short.

HFN Long/Short Equity Index

This index includes funds that typically buy equity securities with the expectation they will go up in price and sell short equity securities with the expectation they will decline in price. Funds may either be “net long” or “net short” and may change their net position frequently. The basic belief behind this strategy is that it will allow the fund to profit from both undervalued and overvalued securities and protect capital in many types of market conditions.

HFN Macro Index

This index includes funds that trade a variety of security types in an attempt to capitalize on shifts in the global economy. Derivatives are often used to speculate on currency, commodity and interest rate movements.

HFN Market Neutral Equity Index

This index includes funds that pursue an equity based strategy that attempts to eliminate systematic market risk and target profitability in most market conditions.

HFN Mortgages Index

This index includes funds that primarily invest in mortgage-backed or mortgage-related securities.

HFN Multi-Strategy Index

This index includes funds that run several different strategies in-house that contribute to the total performance of the fund. A multi-strategy product may consist of one or a number of managers simultaneously operating, for example, a distressed debt portfolio, merger-arbitrage, convertible arbitrage and long/short equity strategies for the same fund.

HFN Options Strategies Index

This index includes funds that focus on trading options.

HFN Regulation D Index

This index includes funds that primarily make private investments in public entities (PIPEs).

HFN Merger / Risk Arbitrage Index

This index includes funds that invest in event-driven situations, such as leveraged buy-outs, mergers, and hostile takeovers. Managers purchase stock in the firm being taken over and, in some situations, sell short the stock of the acquiring company.

HFN Short Bias Index

This index includes funds that consistently have a “net short” exposure to the market. This category also includes funds that exclusively short securities.

HFN Small/Micro Cap Index

This index includes funds that are typically long biased, with the manager exclusively focusing on securities of small and micro cap issuers.

HFN Special Situations Index

This index includes funds that invest in securities of companies in “Special Situations” and may broadly consist of some type of event driven strategy. Managers will opportunistically trade in any type of security that they deem to be a “special situation.”

HFN Statistical Arbitrage Index

This index includes funds with an investment philosophy that equities behave in a way that is mathematically describable, leading managers to pursue a typically low risk, market neutral, highly quantitative equity strategy. The strategy’s profit objective is to exploit mispricings in as much of a risk-free manner as possible.

HFN Technology Sector Index

This index includes funds that are primarily invested in securities revolving around the technology sector.

HFN Value Index

This index includes funds that invest in stocks which are perceived to be selling at a discount to their intrinsic or potential worth; i.e., “undervalued,” or stocks which are out of favor with the market and are “under followed” by analysts. The managers believe that the share price of these stocks will increase as the “value” of the company is recognized by the market.

DESCRIPTIONS OF HFN UCITS III HEDGE FUND INDICES (2)

The HFN UCITS III benchmarks only include the primary class from each UCITS III compliant fund. Only hedge fund products structured to meet UCITS III regulatory framework are included. The general methodology used for index calculation is the same as all other HFN indices.

Index constituents are determined using the following hierarchy:

a) Sole listed UCITS III product
b) Euro currency class
c) Lowest fee structure
d) Largest fund assets
e) Earliest return start date

If multiple classes exist with matching criteria, the class with the earliest inception date is defined as the primary product.

HFN Hedge Fund UCITS Index

This index is calculated using all of the primary UCITS III compliant hedge fund products reporting to the HFN Database.

HFN Long/Short Equity UCITS Index

This index includes the primary products of UCITS III compliant hedge funds in the HFN Database utilizing a long/short equity strategy.

DESCRIPTIONS OF HFN REGIONAL AND COUNTRY SPECIFIC INDICES (13)

Indices contain funds that invest primarily in the markets and issuers located in specific regions or countries. The investment regions and countries are represented by the following indices:

  • HFN Asia Index
  • HFN Europe Index
  • HFN Global Index
  • HFN Latin America Index
  • HFN Middle East/North Africa Index
  • HFN North America Index
  • HFN Australia Index
  • HFN Brazil Index
  • HFN China Index
  • HFN India Index
  • HFN Japan Index
  • HFN Russia Index
  • HFN US Index

DESCRIPTIONS OF HFN FUND OF FUNDS STRATEGY INDICES (3)

HFN Fund of funds (Single Strategy) Index

This Index includes funds of funds that invest in hedge funds all of which operate one specific strategy, for example, a FoF that invests solely in long/short equity hedge funds.

HFN Fund of funds (Market Neutral) Index

This Index includes fund of funds that target very low correlation to the market or invest exclusively in market neutral or arbitrage strategies.

HFN Fund of funds (Multi-Strategy) Index

This Index includes funds of funds that invest in a basket of different strategies.

DESCRIPTIONS OF HFN AGGREGATE INDICES (4)

HFN Hedge Fund Aggregate Index

HFN’s flagship benchmark is an equal weighted average of all hedge funds and CTA/managed futures products reporting to the HFN Database. Constituents are aggregated from each of the HFN Strategy Specific Indices.

HFN Fund of Funds Aggregate Index

Constituents are aggregated from the following indices:

  • HFN Fund of Funds – Single Strategy Index
  • HFN Fund of Funds – Market Neutral Index
  • HFN Fund of Funds – Multi-Strategy Index

HFN Equity Hedge Aggregate Index

Constituents are aggregated from the following indices:

  • HFN Long Only Index
  • HFN Long/Short Equity Index
  • HFN Regulation D Index
  • HFN Short Bias Index
  • HFN Value Index

HFN Relative Value Aggregate Index

Constituents are aggregated from the following indices:

  • HFN Convertible Arbitrage Index
  • HFN Fixed Income Arbitrage Index
  • HFN Merger/Risk Arbitrage Index
  • HFN Mortgages Index
  • HFN Multi-Strategy Index
  • HFN Statistical Arbitrage Index

Please contact research@evestment.com with any questions regarding the publication or calculation of the HFN Indices. Copyright © 2012 eVestment Alliance, LLC (“eVestment”).  All rights reserved.  HFN and eVestment are the service marks of eVestment or its affiliated entities.  All content of the HFN Indices is proprietary to eVestment.