HFR has a long history in hedge fund indexation: In 1993, an affiliate of HFR Investments, Hedge Fund Research, Inc., was a first mover in hedge fund indexation when it launched the HFRI family of hedge fund indices – a series of benchmarks designed to reflect the overall universe of hedge funds. This was a monumental moment for the industry as investors and fund managers now had a more representative way to benchmark their hedge fund performance.
Shortly after, as a result of serious interest from institutional investors, HFR's asset management arm launched the first investable hedge fund index product, the HFRX familiy of Indices. For the first time, institutional investors were able to invest directly into benchmarks. The HFRX Indices are the longest active investable hedge fund benchmarks, with track records over 16 years.
Why Investable Indices?
For decades, HFR has collected data on minority- and women-owned hedge funds and alternative energy-focused hedge funds. HFR constructs indices that are representative of the diverse hedge fund universe within the HFRX family of funds: the HFRX Diversity Index (2003 inception) and the HFRX Diversity Women Index (2007 inception). The HFRX Diversity indices are designed to be representative of the overall composition of minority-owned hedge funds and women-owned hedge funds, respectively. The constituents of the HFRX Alternative Energy Index (2006 inception) employ an investment process designed to identifying companies engaged in the development of new, clean sources of energy.
HFRX Family of Indices
The HFRX is a family of investable indices constructed to be representative of the hedge fund universe. Quantitative and qualitative methodology was developed by Hedge Fund Research, LLC to ensure the most accurate representation.
Each segment applies the same HFRX methodology but uses different investment vehicles to access the hedge fund exposures.
HFRX is structured in three investable segments:
1. Liquid Alternative UCITS Constituents – Invests in UCITS funds with hedge fund strategies
2. Hedge Fund Constituents – Direct investment into hedge funds
3. Separately Managed Account Constituents (SMA’s) – SMA’s structured on HFR’s platform that trade “pari passu” to the hedge fund manager’s fund
Constituent Selection Process
- Cluster and correlation analysis
- Monte Carlo simulations
- Investment manager due diligence
- Fund track record
- Open to new investment
Once the constituents are selected, those most representative of their group or strategy are weighted more heavily.
Index strategies, such as Equity Hedge or Event Driven, are asset weighted based on the distribution of assets in the hedge fund industry.
The HFRX methodology selects constituent funds that, when aggregated and weighted, have a high statistical likelihood of producing return streams that are representative of the specified group or strategy.
HFRX Tracker Funds
HFR designs and structures investment vehicles that track the HFRX indices. Each Tracker fund is designed to replicate the risk and return profile of each corresponding HFRX index. HFR offers turnkey tracker funds that are immediately available for investment as well as custom index products specifically designed for institutional investors’ needs.
HFRX Tracker Funds Utilization:
- Capture benchmark performance
- Allocate capital to HFRX strategies with low correlation to your portfolio
- Allocate capital to HFRX negatively correlated strategies to your portfolio
- Put unallocated capital to work to capture global hedge fund market returns
- Optimize excess collateral by investing in HFRX strategies
- Employ HFRX Strategies as part of your portable alpha program