10 South Riverside Plaza, Suite 700
Chicago, IL 60606 USA
Phone: (312) 658-0955
Fax: (312) 658-1019
info@hfr.com
HEDGE FUND RESEARCH, INC.
www.hedgefundresearch.com
HFR INDICES - BASIC METHODOLOGY AND FAQ
What characteristics differentiate the HFRI and HFRX Indices?
The table below illustrates the general differences between the two indices:
Category
HFRI Monthly Indices
HFRX Indices
Inception
January 1990
April 2003
Varies (see matrix below)
Weighting
Equal-weighted
Reporting Style
Net of all fees
Net of all fees
Performance Time Series Available
Monthly
Most Daily, All Monthly
NAV's available
No
Yes, for daily-published HFRX
Index calculated
Three times per month
Most Daily, All Monthly
Index performance finalized
Trailing four months of performance are
subject to revision.
Performance finalized at month-end
Index rebalanced
Monthly
Quarterly
Criteria for fund inclusion
Listing in HFR Database; Reports monthly net
of all fees monthly performance and assets in
USD
In addition to meeting HFRI criteria, fund must
be open to new transparent investment and
meet track record and minimum asset size
requirements as listed below
Minimum Asset Size or Track Record for fund
inclusion
$50 Million minimum or > 12-Month Track
Record
Index Denomination
USD
Investable Index
No
HFR Asset Management, LLC constructs
investable products that track HFRX
Constituents Details
Available to HFR Database subscribers
Available to HFR Database subscribers
Number of Constituent Funds
Over 2000 in HFRI Fund Weighted
Composite; over 800 in HFRI Fund of Funds
Composite
55 funds in HFRX Global Hedge Fund Index
Performance available to
$50 Million and 24-Month Track Record
(typical)
USD; some HFRX also available in EUR, JPY,
GPB, and/or CHF
Published on HFR website and through various market data services
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Describe the HFRX Indices methodology and construction
The HFRX Indices (“HFRX”) are a series of benchmarks of hedge fund industry performance
which are engineered to achieve representative performance of a larger universe of hedge fund
strategies. Hedge Fund Research, Inc. (“HFR, Inc.”) employs the HFRX Methodology, a
proprietary and highly quantitative process by which hedge funds are selected as constituents for
the HFRX Indices. This methodology includes robust classification, cluster analysis, correlation
analysis, advanced optimization and Monte Carlo simulations. More specifically, the HFRX
Methodology defines certain qualitative characteristics, such as: whether the fund is open to
transparent fund investment and the satisfaction of the index manager’s due diligence
requirements. Production of the HFRX Methodology results in a model output which selects
funds that, when aggregated and weighted, have the highest statistical likelihood of producing a
return series that is most representative of the reference universe of strategies.
Constituents of HFRX Indices are selected and weighted by the complex and robust process
described above. The model output constitutes a sub-set of strategies which are representative of
a larger universe of hedge fund strategies, geographic constituencies or groupings of funds
maintaining certain specific characteristics.
In order to be considered for inclusion in the HFRX Indices, a hedge fund must be currently open
to new transparent investment, maintain a minimum asset size (typically $50 Million) and meet
the duration requirement (generally, a 24 month track record). These criteria may vary slightly
by index.
Describe the HFRI Monthly Indices methodology and construction
The HFRI Monthly Indices (“HFRI”) are a series of benchmarks designed to reflect hedge fund
industry performance by constructing equally weighted composites of constituent funds, as
reported by the hedge fund managers listed within HFR Database. The HFRI range in breadth
from the industry-level view of the HFRI Fund Weighted Composite Index , which encompasses
over 2000 funds, to the increasingly specific-level of the sub-strategy classifications.
In order to be considered for inclusion in the HFRI, a hedge fund manager must submit a
complete set of information to HFR Database (the listing of required fields for Database
inclusion are available here). Funds are eligible for inclusion in the HFRI the performance a
month after their addition to HFR Database. For instance, a fund that is added to HFR Database
in June is eligible for HFRI inclusion starting with July performance. Additionally, all HFRI
constituents are required to report monthly, net of all fees performance and assets under
management U.S. dollars. Constituent funds must have either (a) $50 million under management
or (b) a track record of greater than twelve (12) months.
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The HFRI are fund-weighted (equal-weighted) indices. Unlike asset-weighting, the equalweighting of indices presents a more general picture of performance of the hedge fund industry.
Any bias towards the larger funds potentially created by alternative weightings is greatly
reduced, especially for strategies that encompass a small number of funds.
Are either of the HFRI or HFRX Indices investable?
HFRI:
The HFRI Indices are equally weighted performance composites and are not
investable through Hedge Fund Research, Inc. or any affiliated companies.
HFRX:
The HFRX Indices not investable through Hedge Fund Research but are
investable through Tracker Funds which are constructed by HFR Asset Management, LLC, a
registered investment adviser and asset management company. Performance data on the
investable products is only available through HFR Asset Management, LLC. Performance data
available through Hedge Fund Research, Inc. is a model output and not the performance of the
investable products.
How do I obtain a list of constituents for the HFRI and HFRX Indices?
The constituent funds of the HFRI Monthly Indices are currently available within the
subscription-based HFR Database. Information on the underlying constituents of the HFRX
Indices is currently available to investors of the HFRX Tracker products, as well as to HFR
Database subscribers.
How do I subscribe to the HFR Database?
Contact HFR at 312-658-0955 or database@hfr.com
How often is index performance updated?
HFRI:
Three-times-per-month: (1) The “Flash” update is published on the fifth business
day of the month; (2) The “mid-month” update is published on 15th of the month (or nearest
business day); and (3) the “month-end” update is published on the first business day of the
following month. Additionally, the trailing four months of performance are subject to revision as
HFR receives updates from lagged funds.
HFRX:
Daily performance is available for some, but not all, HFRX Indices. The update
frequency of HFRX Index performance can vary by product but all HFRX Indices provide
monthly performance returns.
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How often are funds added to the indices?
HFRI: Funds are added to the HFRI on a regular basis as HFR identifies candidates for
inclusion.
HFRX: Funds are typically added to the HFRX on a quarterly basis as a result of the HFRX
Methodology model.
When is a fund removed from the HFRI or HFRX Index and how is survivorship bias taken
into consideration?
A fund will be removed from an Index when: (a) it liquidates, (b) the fund manager requests
removal from the Database, or (c) it fails to satisfy the requirements for constituency (outlined
above). However, a fund’s past performance will always remain in its respective index up until
the point of liquidation or manager-requested removal from HFR Database. In an effort to limit
survivorship bias, HFR exhausts all efforts to receive a fund’s performance until the point of
final liquidation. This convention provides the most robust characterization of results possible.
Likewise, when a new fund is added to either Index, the historical performance of the new
constituent fund will not affect the finalized historical performance of either index. And while
the HFRX are finalized upon the date reported, the HFRI are subject to revisions for the trailing
four months, although index results are unlikely to be meaningfully impacted by submissions
later than 30 days from the end of the performance month. If a non-liquidated fund does not
report to HFR Database for three consecutive months, the fund is subject to removal from the
HFRI.
Is it possible for a fund to be a constituent of multiple indices?
HFRI: Constituent funds are included in only one strategy-level index; however, all singlemanager constituents are included in the HFRI Fund Weighted Composite and all fund of funds
are included in the HFRI Fund of Funds Composite Index.
HFRX: Constituent funds are included in only one strategy-level index; however, most
constituents are also included in the HFRX Global and HFRX Equal-Weighted composite
indices.
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What are the limitations on references to and distribution of HFRI and HFRX Index data?
The HFRI and HFRX are both produced as benchmarks of hedge fund industry performance and
are intended to be utilized as points of reference for relevant hedge fund products. Specific
guidelines are available in the HFR Terms of Use Agreement.
Usage or distribution of the HFRI or the HFRX in a commercial format, for public distribution,
or for inclusion in products (as a component of a commercially distributed research report,
project or textbook) can only be made available with specific authorization from Hedge Fund
Research, Inc. Please direct inquiries to info@hfr.com or call 312-658-0955.
Does a commercial arrangement exist between HFR and the hedge fund managers which
report performance of their funds?
Reporting results to HFR Database is voluntary and managers are not compensated financially
for their inclusion. Likewise, managers submit their fund and firm information to HFR Database
and become visible to HFR Database subscribers at no charge.
Are submissions of performance results audited?
HFR makes every effort to ensure performance results are accurate and comply with reporting
requirements. Although not required, many hedge fund managers voluntarily provide HFR with
fund offering documents and audited financial statements as a testament to their integrity.
Internal procedures that identify and correct infrequent data errors are utilized. Hedge fund
managers are solely responsible for reporting accurate and timely information to HFR. Since
participation in HFR Database is voluntary, as well as for practical reasons, HFR does not
perform an independent financial audit of the funds contained in HFR Database.
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HFRX Indices Weighting Matrix
HFRX Index
Index Weighting
HFRX GLOBAL INDICES
HFRX Global Hedge Fund Index
HFRX Equal Weighted Strategies Index
Representative Optimization
Equal-weighted
HFRX Absolute Return Index
Representative Optimization
HFRX Market Directional Index
Representative Optimization
HFRX STRATEGY INDICES
HFRX Convertible Arbitrage Index
Representative Optimization
HFRX Distressed Securities Index
Representative Optimization
HFRX Equity Hedge Index
Representative Optimization
HFRX Equity Market Neutral Index
Representative Optimization
HFRX Event Driven Index
Representative Optimization
HFRX Macro Index
Representative Optimization
HFRX Merger Arbitrage Index
Representative Optimization
HFRX Relative Value Arbitrage Index
Representative Optimization
HFRX Volatility Index (Monthly)
Representative Optimization
HFRX GLOBAL AND CURRENCY INDICES
HFRX Global Hedge Fund EUR Index
Representative Optimization
HFRX Global Hedge Fund JPY Index
Representative Optimization
HFRX Global Hedge Fund CHF Index
Representative Optimization
HFRX Global Hedge Fund GBP Index
Representative Optimization
HFRX Equal Weighted Strategies EUR Index
Equal-weighted
HFRX Equal Weighted Strategies JPY Index
Equal-weighted
HFRX Equal Weighted Strategies CHF Index
Equal-weighted
HFRX Equal Weighted Strategies GBP Index
Equal-weighted
Representative Optimization defined as: Constituents weighted according to HFRX Methodology in order to achieve representative
performance of a larger universe of hedge funds.
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Disclaimer: Information contained herein is subject to change at any time without notice.