Title

Investable market neutral hedge fund indices: An examination of whether these indice eliminate market risk?

Date of this Version

7-5-2009

Document Type

Conference Paper

Publication Details

Published version.

Simone, K., Gulasekaran, R. & White, A. (2009). Investable market neutral hedge fund indices: An examination of whether these indice eliminate market risk? Paper presented at the 2009 Accounting and Finance Association of Australia and New Zealand (AFAANZ) Conference, Adelaide, South Australia.

Access the conference

2009 HERDC submission. FoR code: 1502

© Copyright Simone, K., Gulasekaran, R. & White, A., 2009

Abstract

Market neutral hedge funds are attractive portfolio constituents when they eliminate market risk. Is this the case for the relatively new investable market neutral hedge fund indices? Given the significant growth in index investing and the number of investable hedge fund index products, we conduct the first empirical assessment of whether the investable market neutral hedge fund indices exhibit this characteristic.

To make this assessment, we adjust the Four Moment Capital Asset Pricing Model adopting conditional measures of systematic variance, systematic skewness and systematic kurtosis as the regressors. This new model is then used to test whether there is a significant relationship between the investable hedge fund indices and the regressors. Our results support the proposition that the investable market neutral hedge fund indices eliminate market risk. As such, we suggest these indices should be attractive portfolio constituents and may supplant market neutral hedge funds in optimal portfolios. We posit that either the selection criteria or the index construction method adopted by the index provider or both is the driver of this result.

 

This document has been peer reviewed.