Alphas of the Pack—Follow the Leader?

For institutional investors, widely cited hedge fund indices such as the HFRI Fund Weighted Composite reflect a universe dominated by funds that are too small, too beta-driven, or otherwise not worth considering for scalable diversifying solutions. Furthermore, many larger, more alpha-focused funds choose not to report to a subscription database like HFRI’s and just provide information to their investors and consultants. Without these funds, which can offer a better risk-adjusted return profile, hedge fund indices are even less representative of what institutional investors seek.

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With these shortcomings of popular benchmarks in mind, Callan created an alternative benchmark comprised of the larger, commonly held hedge funds being used by institutional investors to diversify their equity risks.

As detailed in Callan's most recent Hedge Fund Monitor entitled Alphas of the Pack, the Callan Institutional Hedge Fund (CIHF) Peer Group serves two primary purposes:

  1. It provides a more relevant benchmark of hedge fund solutions that institutional investors are more likely to use as diversifiers to their existing stock and bond exposures.
  2. It encompasses a candidate pool from which Callan considers direct hedge fund solutions for any client-related search or evaluation.

Although this CIHF peer group of 50 hedge funds is not intended to represent a blanket recommendation of all its constituents, the roughly $1 trillion of regulatory assets under management in these private funds does indicate that institutional investors have a significant stake in their performance outcomes.

With Callan’s long experience with hedge fund solutions, including fund-of-funds (FOFs), over many market cycles, we also want to manage expectations of how this Peer Group will perform. Given that these funds pursue the same hedge fund strategies used by FOFs within our Absolute Return FOF Style Group, we expect CIHF’s overall performance profile to be similar, on average, albeit with one less level of fees being charged. Like FOFs representing broadly diversified solutions, the funds within CIHF are also well-diversified. However, these individual funds naturally involve more manager-specific risk. So, depending on an investor’s percent allocation to hedge funds, multiple fund allocations may be appropriate to diversify manager-specific risks.

For more information, contact Jim McKee at 415-274-3041 or other members of Callan’s Hedge Fund Research team.