Tremont Advisers pushes new fund of hedge funds benchmark

Tremont Advisers, a fund of hedge funds with more than $8 billion in assets under management, based in Rye, New York, is proposing a new fund-of-hedge-fund performance benchmark comprising a blend of 70% three-month Libor and 30% S&P 500. If it catches on, the hedge fund industry could have a new more reliable standard for institutional fund-of-hedge-fund portfolio benchmarking.

Tremont claims existing performance measures – aggregate and fund-of-hedge-fund performance indexes – are not investable and do not accurately enough categorise funds by style, for example, global macro, long-short equities and fixed-income relative value. As a consequence, many institutional investors have opted for a stop-gap performance measure of the going risk-free rate of return, Libor, plus a spread and some allowable volatility.

Tremont arrived at its Libor/S&P 500 mix by constructing a model 'opportunistic', or equity-like, institutional fund-of-hedge-fund portfolio and back tested it against eight years of hedge fund performance data. After arriving at an historic volatility for the model portfolio, Tremont found the same volatility on a continuum of different weights of the S&P 500 and Libor and arrived at the 3:7 ratio.

An investor would invest in an ‘opportunistic’ fund of funds, as opposed to a 30% Libor and 70% S&P 500 basket, because, while the volatilities are the same, the fund of funds offers higher returns that are little correlated with other traditional asset classes in an investor’s portfolio.

Tremont, which is seeking to build its pension fund investor base, has one client basing its performance against the new benchmark – the Teacher Retirement System of Texas.