Markov Processes International (MPI), an investment research house based in New Jersey, US, has launched the MPI Hedge Fund Indices, a brand of investable indices tracking segments of the hedge fund universe.
Rohtas Handa, head of institutional solutions at MPI.
Each MPI hedge fund index has two components: the first involves a sub-set of targeted hedge funds, while the second aims to closely track the first through the exclusive use of ETFs.
These second tracker indices are constructed using MPI’s patented ‘Dynamic Style Analysis’ model, which seeks to capture the dynamic mix of market factors that drive hedge fund returns over time.
Due to the liquid, investable nature of the underlying ETFs, the tracker indices are suitable as underlying references for investment products such as ETFs.
According to MPI, while first generation hedge fund indices sought to measure the performance of the entire industry (introducing biases that skewed results), MPI’s model seeks to correct for this shortcoming by targeting elite subsets of hedge funds to create a more stable, accurate gauge for measuring performance.
“The Hedge Fund Index 2.0 model is the product of MPI’s more than 25 years of experience analyzing complex and opaque investment strategies,” said Rohtas Handa, head of institutional solutions at MPI. “We are now combining that experience with our patented dynamic factor model, DSA, to build better benchmarks for hedge fund performance.”
The first new index to launch under the MPI brand is the MPI Barclay Elite Systematic Traders Index, which captures the returns of the 20 largest systematic traders reporting into BarclayHedge, MPI’s partner for the index. The index is paired with the MPI BEST 20 Tracker Index.
“We are delighted to be working with MPI to launch the MPI Barclay Elite Systematic Traders Index,” said Sol Waksman, president at BarclayHedge. “We’ve been approached in the past by firms looking to deliver on a similar promise. In those cases, and despite valiant efforts, index performance quality fell short of our standards. MPI, however, has delivered what we think will be a game changer.”
The suite also includes the existing Eurekahedge 50 Index and its tracker, the MPI Eurekahedge 50 Tracker Index, both of which launched before the new business line was officially established. Introduced in 2014 in partnership with alternative investment research firm Eurekahedge, the index provides a measure of the world’s 50 largest institutional quality hedge funds.
The market for hedge fund-style ETFs strategies is relatively under-explored and probably has room to grow; while the IQ Hedge Multi-Strategy Tracker ETF (QAI US), provided by New York-based asset manager Index IQ, boasts over $1.1 billion in assets under management, the next eight such ETFs collectively have approximately $250 in AUM.
QAI, which launched in 2009, was the first hedge fund replication ETF. The rules-based fund replicates the performance of hedge funds using various hedge fund investment styles, including long/short equity, market neutral, event-driven, fixed income arbitrage and emerging markets. It does not invest in hedge funds but primarily will hold other ETFs to gain its exposure. Index IQ recently lowered the fund’s expense ratio from 0.75% to 0.53%.
In Europe, investors may achieve a similar exposure through the $75 million UBS ETF HFRX Global Hedge Fund Index UCITS ETF (HFEUAS SW). The fund smooths the volatility generally associated with a single hedge fund by diversifying across many strategies. The strategies are asset-weighted based on the distribution of assets in the hedge fund industry, thereby aiming to be representative of the overall composition of the global hedge fund universe. It has a TER of 0.34%.