Which hedge fund indices suit best for investors?

Abstract

In contrast to most traditional assets, alternatives, especially hedge funds, do not have a distinct universe. This complicates proper performance measurement since most benchmarks suffer from statistical biases, deceiving investors about the "true” return an average hedge fund would have achieved. We investigate these influences, present an index for Swiss registered hedge funds which aims to avoid common biases and conclude that the systematic underperformance of funds of hedge funds compared to single hedge funds is mostly a result of bias mitigation. This indicates that the returns of fund of hedge funds indices are the most accurate for benchmarking both single- and funds of hedge funds.In contrast to most traditional assets, alternatives, especially hedge funds, do not have a distinct universe. This complicates proper performance measurement since most benchmarks suffer from statistical biases, deceiving investors about the "true” return an average hedge fund would have achieved. We investigate these influences, present an index for Swiss registered hedge funds which aims to avoid common biases and conclude that the systematic underperformance of funds of hedge funds compared to single hedge funds is mostly a result of bias mitigation. This indicates that the returns of fund of hedge funds indices are the most accurate for benchmarking both single- and funds of hedge funds