Markov Processes International, a research, technology and analytics firm, has started a hedge fund index business that provides original benchmarks to gauge managers’ performance and gives investors exposure to their strategies.
Rohtas Handa, head of institutional solutions and the new index business for MPI, says the effort grew out of the firm’s belief that investors can systematically capture the beta — or systematic factors — of hedge fund strategies by using less expensive formulaic indexes as an alternative to direct investments in hedge funds.
“There’s no reason for beta to be expensive," Handa said in a phone interview. "This is our attempt to make beta more accessible, including hedge fund beta.”
During his tenure at FTSE International between 2010 and 2014, Handa worked with asset owners and consultants as head of global sales for smart beta products, including fundamental indexes designed by Rob Arnott’s Research Affiliates. Smart beta, or factor-based funds, have become increasingly popular as alternatives to active managers.
Asset managers have designed algorithms to search for securities with characteristics such as quality, low volatility and value — factors that are academically proven sources of stock returns. Smart beta is the second iteration of indexing popularized by companies such as Vanguard Group, founded by Jack Bogle, and State Street Global Advisors. Unlike equities, research on the sources of hedge fund factors is still in the fairly early stages.
[II Deep Dive: Managers’ New Hustle Is Outsourced-R&D]
MPI is capitalizing on investors' interest in both hedge fund factors and in investable indices. In a recent sign of their popularity, State Street earlier this month started licensing proprietary investable indices to money managers.
MPI’s new effort is an attempt to create an alternative to existing hedge fund benchmarks that follow the entire market and whose composition can fluctuate as smaller funds fail to report their holdings or close altogether. MPI will instead include only the returns of the largest firms, which it believes are more stable and give a true picture of performance.
“Our goal is to capture the beta that a broad set of hedge funds are exposing themselves to,” said Handa. Investors will be able to access hedge fund strategies by using liquid and transparent exchange-traded funds through MPI's investable index.
MPI’s first benchmark and investable index launch focuses on systematic managed futures, which it believes will get a lot of attention from investors given the current volatile market environment. Managed futures do well when equity markets are falling.
Together with BarclayHedge, MPI has developed the MPI Barclay Elite Systematic Traders Index, which aims to capture the returns of the 20 largest systematic managed futures hedge funds that report information monthly to BarclayHedge. The benchmark has a companion investable index called the MPI BEST 20 Tracker Index. The tracker consists of ETFs that investors can use to gain exposure to the strategy that the benchmark is designed to follow. MPI will be able to update the benchmark and tracker on a monthly basis, in line with managers' reporting.
To create benchmarks and trackers, MPI is using proprietary software that can assess the returns of any investment to determine the specific bets the manager is making.
Although Handa declined to provide specifics, MPI is planning to launch other benchmarks and trackers, particularly those focused on public markets. In 2014, MPI and Eurekahedge developed the Eurekahedge 50 and the MPI Eurekahedge 50 Tracker Index. The index, which was developed to provide a measure of the world's 50 most successful hedge funds, will continue to be maintained as part of MPI's index business.
