Chicago-based Hedge Fund Research (HFR) is set to launch the first futures contract on a hedge fund index in partnership with a major derivatives exchange.
Marc Denogent, managing director of HFR Asset Management, told Funds Europe that the firm took six months to research if the proposition was technically viable.
“If you’re a hedge fund investor it takes a long time to do your due diligence on a hedge fund manager…It’s a very inefficient way of allocating capital to hedge funds,” said Denogent.
The HFRI-I (Fund Weighted Composite Investable Index) futures contract would only require an initial margin of 10%. This would allow the average institutional hedge fund portfolio to retain 100% exposure to hedge funds while freeing up cash balances to pursue other opportunities, facilitate rebalancing or improve liquidity.
According to Denogent, one of the biggest problems is that people compare equity returns to hedge fund returns but fail to compare to volatility of both.
The HFRI-I futures contract would enable investors to leverage their exposures to hedge funds up or down to coincide with their level of risk tolerance and corresponding return objectives.
For example, if equity volatility is 15%-20%, while hedge fund volatility is nearer to 5%-10%, a futures contract on the HFRI-I would enable an investor to allocate 2-3 times the exposure to match.
The futures contract on the HFRI-I will be traded on exchange and cleared through a clearing house, thereby reducing counterparty risk.
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