Nomura has launched a series of hedge fund replication indexes in partnership with Hedge Fund Research (HFR), aiming to replicate the high returns generated by hedge funds in a more transparent way.
The HFRq Hedge Fund Replication Long Index and the HFRq Hedge Fund Replication Short Index are based on the HFRI Fund Weighted Composite Index. Unlike most hedge fund replication indexes, which are backward-looking and use historical data, the indexes use a forward-looking measure and risk metric sensitivity data – which works like a stress test for hedge fund indexes – to try to achieve closer correlation with the underlying indexes than other hedge fund replicators. The indexes have a correlation of 93% to the underlying index.
Hedge funds have come under scrutiny over the past couple of years during the financial crisis as they lack transparency and are illiquid, making it difficult for investors to take their money out once they are invested in them. They are inaccessible to a lot of investors who do not have the capital available to meet investment requirements and the high management fees.
"Hedge funds have generated good and enhanced risk-adjusted returns compared with long-only equity or fixed-income investments," says Mohamed Yangui, managing director, head of product development and structuring at Nomura in London. "But they have drawbacks, which we have seen over the past couple of years. There has been a need for liquid and transparent underlyings, which is why hedge fund replication indexes have become more popular. They address these problems and allow investors to have hedge fund-like exposure with an efficient cash use."
Exposure to the index will be offered through structured products and through a Ucits III fund, issued by Nomura.