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Index Methodology

Hedge fund index construction methods tend to vary between index providers.  Here we provide an overview of the construction and management methods employed by the Nordic Hedge Fund Index (NHX).  

The index aims to represent the entire universe of Nordic hedge funds. For investors to successfully use the NHX as a reference point from which to gauge the relative performance of the Nordic hedge fund industry it is essential that the index has the following properties¹;

• Transparency
• Accuracy and punctuality of data
• Stability
• Representativeness
• Purity

These properties are discussed in the following sections.  

Transparency

In order to provide a level of transparency, the composition of the NHX is made available to interested parties.  The list of funds can be found on HEDGENORDIC.COM (Hedge Fund Directory) and is published each month in The Nordic Hedge Fund Journal.

The NHX is an equal weighted index.  The Index value is calculated from the arithmetic mean of monthly returns from all constituents in the index. The HEDGENORDIC indices were launched at index value 100 as of 1 January 2005 and have historical data for each index going back as long as possible, provide there are a minimum of 5 index constituents in the category at all times.

Arithmetic Mean:  (a1+ ...+aN)/N

The index is equal weighted to ensure:

• Consistency with the majority of hedge fund indices which are also equal weighted.

• Index is representative of the performance of all funds i.e. there is no unfair weighting towards a minority of the largest funds holding the most AUM

Accuracy and punctuality of data

The Nordic Hedge Fund Index is published on a monthly basis (one month delayed).  The final index value is published on the 5th day of each month once all performance results have come in from the individual fund managers.  An index preliminary estimate is provided during the course of the active reporting month and is updated as each fund submits their performance data.

All data submitted to HEDGENORDIC by its constituent fund managers is checked prior to updating the preliminary index value. 

Prior to publication of the final index value all data is checked for consistency against the performance figures provided by each manager to their investors. 

Stability

The hedge fund universe is constantly evolving, this creates the need for a trade off between an index that accurately depicts the performance of the Nordic hedge fund industry and one that provides a stable reference for investors.  HEDGENORDIC tries to provide an element of stability whilst still accomodating new funds in order to better reflect the developments within the industry.  The index is therefore updated on a monthly basis to accomodate the submission of any fund inclusions. Any new fund included in the index will only have its ongoing performance reflected in the index, even if the fund has a performance history prior to inclusion in the index. 

In order to provide stability for investors and minimize the effects of survivorship bias, any fund that ceases operations and no longer contributes data to the index will still have its prior performance history maintained. 

HEDGENORDIC reserves the right to adjust the index history ex-post in a discretionary manner 

Representativity

In order for the NHX to truly represent the universe of Nordic hedge funds, HEDGENORDIC conducts ongoing research to  ensure all funds in existance are discovered and included in the index.  In this respect HEDGENORDIC tries to provide an exhaustive database of funds in the Nordic region from which the NHX aims to include all of these funds in the calculation - in order for the index to be representative of the database itself. 

Purity

HEDGENORDIC defines 5 strategy categories from which to classify member funds;

1. Equity Strategies (equity and equity derivatives)
2. Fixed Income Strategies (fixed income and derivatives)
3. Multi Strategy/diversified Strategies (a fund is classified as Multi Strategy if less than 80% of the fund’s activities comes from one particular classification category)
4. Managed Futures/CTA’s (listed financial and commodity futures and foreign exchange, usually a systematic, i.e. model driven approach)
5. Fund of Hedgefunds (funds that invest in other hedgefunds)

Hedge funds are classified into one of the 5 categories listed above. Determination of the category is initially done by the fund manager when submitting the fund(s) for inclusion into the index. Subsequently, the staff at Hedgenordic will review the fund’s Offering Memorandum (or PPM) and marketing material to verify that the chosen classification category is consistent with the overall classification structure and index methodology.

Selection criteria imposed by HEDGENORDIC for inclusion into the database and index is deliberately unrestrictive to provide a high degree of purity of the index.

Both onshore and offshore funds are considered, there are no minimum size requirements, a prior track record is not required, and funds closed to new investors are still eligible for inclusion.

¹ Reference: "A Detailed Analysis of the Construction Methods and Management Principles of Hedge Fund Indices" EDHEC December 2003