Hedge Fund 2008-06-24آ  Hedge Fund Indices Methodology Please refer to the important notice and...

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Transcript of Hedge Fund 2008-06-24آ  Hedge Fund Indices Methodology Please refer to the important notice and...

  • H e d g e F u n d I n d i c e s

    I N D E X M E T H O D O L O G Y

    O b j e c t i v e s & G u i d i n g P r i n c i p l e s C l a s s i f i c a t i o n S t a n d a r d

    I n d e x C o n s t r u c t i o n a n d M a i n t e n a n c e

    A p r i l 2 0 0 6

  • H e d g e F u n d I n d e x M e t h o d o l o g y

    T a b l e o f C o n t e n t s INTRODUCTION ............................................................................................................................................................. 4

    I. THE CHARACTERISTICS OF THE HEDGE FUND OPPORTUNITY SET .............................................. 5

    II. OBJECTIVES AND GUIDING PRINCIPLES.................................................................................................. 5

    III. DEFINING THE UNIVERSE OF HEDGE FUNDS.......................................................................................... 7

    3.1. DEFINITION OF A HEDGE FUND .............................................................................................................................. 7 3.2. DEFINITION OF THE UNIVERSE OF HEDGE FUNDS .................................................................................................. 7

    IV. MSCI HEDGE FUND CLASSIFICATION STANDARDSM............................................................................. 8

    4.1. OBJECTIVES OF THE MSCI HEDGE FUND CLASSIFICATION STANDARD ................................................................. 8 4.2. MECHANICS OF THE MSCI CLASSIFICATION PROCESS........................................................................................... 8 4.3. CLASSIFYING THE UNIVERSE OF HEDGE FUNDS..................................................................................................... 8 4.4. PRIMARY CHARACTERISTICS ................................................................................................................................. 9

    4.4.1. Process Groups......................................................................................................................................... 9 4.4.1.1. Directional Trading ............................................................................................................................................. 10 4.4.1.2. Relative Value..................................................................................................................................................... 10 4.4.1.3. Security Selection................................................................................................................................................ 10 4.4.1.4. Specialist Credit .................................................................................................................................................. 10 4.4.1.5. Multi-Process Group ........................................................................................................................................... 11

    4.4.2. Asset Class .............................................................................................................................................. 11 4.4.3. Geography .............................................................................................................................................. 12

    4.5. SECONDARY CHARACTERISTICS .......................................................................................................................... 12 4.5.1. Industry Focus: GICS Sectors ................................................................................................................ 12 4.5.2. Fixed Income Focus................................................................................................................................ 12 4.5.3. Capitalization Focus............................................................................................................................... 12 4.5.4. Additional Granularity ........................................................................................................................... 13

    4.6. DEFINING FUND STRATEGY ................................................................................................................................. 13 4.6.1. Examples of Fund Classifications........................................................................................................... 14

    V. INDEX DESIGN ................................................................................................................................................. 15

    5.1. INDEX STRUCTURE............................................................................................................................................... 15 5.2. CONSTITUENT WEIGHTING .................................................................................................................................. 16 5.3. INDEX FAMILIES .................................................................................................................................................. 17

    5.3.1. Size Families........................................................................................................................................... 17 5.3.1.1. Broad Index Family.................................................................................................................................. 17 5.3.1.2. Core Fund Index Family .......................................................................................................................... 17 5.3.1.3. Small Fund Index Family ......................................................................................................................... 17 5.3.2. Domicile Families ...................................................................................................................................... 17

    VI. INDEX MAINTENANCE .................................................................................................................................. 18

    6.1. DATA INTEGRITY ................................................................................................................................................. 18 6.2. INDEX CALCULATION TIMELINE .......................................................................................................................... 18 6.3. INDEX COMPOSITION CHANGES ........................................................................................................................... 18

    6.3.1. Fund Addition and Migration ..................................................................................................................... 18 6.3.2. Fund Classification Changes ...................................................................................................................... 19

    APPENDIX I: INVESTMENT PROCESS DEFINITIONS....................................................................................... 20 1. DIRECTIONAL TRADING .................................................................................................................................... 20

    1.1. Discretionary Trading ................................................................................................................................. 20

  • H e d g e F u n d I n d i c e s M e t h o d o l o g y

    1.2. Systematic Trading ...................................................................................................................................... 20 1.3. Tactical Allocation ...................................................................................................................................... 21

    2. RELATIVE VALUE ............................................................................................................................................. 21 2.1. Arbitrage ..................................................................................................................................................... 21 2.2. Merger Arbitrage......................................................................................................................................... 22 2.3. Statistical Arbitrage..................................................................................................................................... 23

    3. SECURITY SELECTION ....................................................................................................................................... 23 3.1. Long Bias..................................................................................................................................................... 24 3.2. No Bias ........................................................................................................................................................ 24 3.3. Short Bias .................................................................................................................................................... 24 3.4. Variable Bias ............................................................................................................................................... 24 3.5. Note on Measuring Net Exposure................................................................................................................ 25

    4. SPECIALIST CREDIT........................................................................................................................................... 25 4.1. Distressed Securities ..................................................................................................................................