LONDON -- Morgan Stanley Capital International Inc. is preparing to launch a family of hedge fund performance indexes in a move to encourage more pension funds to invest in this asset class.
MSCI's initiative is not the first, but the firm's credibility in building benchmark indexes could act as a catalyst for institutional investors to allocate more assets to hedge funds, said Giovanni Beliossi, senior quantitative analyst and head of research for First Quadrant LP, London.
Research published this year by The Hennessee Group LLC, New York, showed U.S. pension funds make up only 13% of hedge fund investors (Pensions & Investments, May 1).
Executives at European pension plans considering their first moves into hedge funds welcomed the concept of a performance benchmark.
According to industry sources, Pensioenfonds ABP, Heerlen, the Netherlands, is looking for hedge fund managers, but a spokesman for the E150 billion ($140 billion) fund would not comment.
However, the plan would welcome performance benchmarks for hedge funds as they would "help improve things," the spokesman said.
"For us it would not make a great difference; we are capable of creating our own benchmarks if we need them. Small pension funds that are not in the same position could benefit.
"The new benchmarks should give a clear view of what's going on in the market so that comparisons can be easily made. For small pension funds it would be useful to have more unity of terminology," said the spokesman.
Trevor Jones, director of pensions at the 2.5 billion ($3.8 billion) Bass Pension Plan, West Bromwich, England, said the most useful tool would be a range of benchmarks reflecting the various permutations of hedge funds.
Trustees of the Bass plan were considering putting a "very small" portion of plan assets into hedge funds, he said.
However, MSCI is still working out how the indexes will be constituted, and final versions are unlikely to be ready before the end of this year, said Baer Pettit, executive director.
"We are not yet there with describing a product that exists," he said.
An initial index would likely be broad-based, looking at a regional and style-based strategy, such as European long/short equity funds.
But users would be able to filter and manipulate the MSCI data as they wished, to create performance benchmarks according to the many types of hedge fund available.
"The need for granularity (detail) is part of the discipline of analysis," he added.
Credit Suisse First Boston Corp., New York, and Tremont Advisers Inc., New York, last November launched a hedge fund index. The index is broad-based, asset size weighted, includes more than 280 funds, and is based on information in the Tremont database.
CSFB is also believed to be launching an investment product based on an investible version of the index, but Roland Lorenzo, director of securities lending, and Bob Sloan, managing director of the equity finance group at CSFB, were not available for comment by press time.
Earlier this year Hedge Fund Research LLC, New York, launched a range of hedge fund indexes in conjunction with Zurich Capital Markets Inc., New York. The Zurich HFR indexes consist of an equally weighted aggregate index and an asset-weighted aggregate index based on the 1,500 funds in the HFR database. The range also includes five subindexes that are style based, tracking funds with the following approaches: convertible arbitrage; equity hedge; event driven; merger arbitrage; and distressed securities.
Zurich Capital Markets also offers investment products based on these specific styles of hedge fund investing, said Edward Doherty, vice president.
MSCI is busy consulting the industry as to how its indexes should be constituted. It is working closely with London-based investment advisers Financial Risk Management Ltd., London, which has built up a database of funds offered by 1,500 hedge fund managers, according to FRM Managing Director Luke Ellis.
The MSCI subindexes most likely would be based on investment style using a three-way classification of funds or managers based on their investment processes, the geographic regions on which they focus and their asset classes.
Weighting the funds according to size could lead to distortions and concentration, said Mr. Pettit.
One New York-based hedge fund analyst criticized the asset-size weighted approach of the CSFB index, saying it was dominated by the largest funds, most of which were U.S. equity long-short funds.
"There is clearly a distinctive move to invest in hedge funds, but pension funds have often done this in the absence of good quality data," said Mr. Pettit. "A lack of transparency is not something in the interests of the industry."