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ELO: Countering Failed Duck Tests on Hedge Funds

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Stockholm (HedgeNordic) – HedgeNordic is excited to bring a new sub-strategy to the Nordic Hedge Index (NHX), albeit with a twist. The Nordic Hedge Index is an equally weighted index designed to track the performance of all Nordic hedge funds. One of the main challenges in running this index involves determining the eligibility criteria for inclusion. Unfortunately, there is no precise, widely accepted, and all-encompassing definition of a hedge fund. This is not unique to the Nordic hedge fund universe, but is a common dilemma across the industry: What qualifies as a hedge fund, and what does not?

To address this issue, HedgeNordic has developed a point scoring system that considers certain “habitual characteristics” typically associated with hedge funds, inspired by the duck test. The duck test is a form of abductive reasoning, usually expressed as “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” The test implies that one can identify an unknown subject by observing that subject’s habitual characteristics. It is sometimes used to counter abstruse arguments that something is not what it appears to be.

Too often though, a strategy that looks like a hedge fund, swims like a hedge fund and quacks like a hedge fund, will not qualify as a hedge fund. In many cases, new candidate listings did not meet the criteria for index inclusion primarily because they did not engage in shorting and followed a long-only strategy. Despite having much of the look and feel of a hedge fund, they would thus not satisfy the criteria to be listed. Other funds, in contrast, may exhibit fewer typical hedge fund characteristics but would qualify for inclusion solely based on their ability to short. At times, this can lead to unsatisfying classifications and leaves room for interpretation. The hedge fund industry has steadily evolved into a highly heterogeneous space, challenging the notion of a hedge fund based on isolated features.

To address this dilemma, HedgeNordic also turned to peer database providers and fund managers for consultation. Scanning the universe, we found a number of contributing managers who, next to their clear-cut hedge funds, also manage long-only funds that they wanted to list. Additionally, some of our subscribers find the listing of such funds useful, with allocators or peers requesting the data for comparison.

Inspired by these findings, we decided to accommodate these strategies in a new, dedicated NHX Sub Index, called “Equity Long-Only (ELO).”

The “Equity Long-Only (ELO)” category will be a sub-category alongside the other NHX sub-strategies. It will be home to those funds that would fall short of qualifying as a hedge fund due to their long-only trading approach, while clearly showing habitual characteristics of a hedge fund strategy.

For a transition and monitoring period, the “Equity Long-Only (ELO)” category will not be part of the NHX Composite index. This means that all funds listed in the new category are not considered constituents of the Nordic Hedge Index (NHX). The performance and performance-related statistics of the new sub-category and its constituents will not affect the overall performance and related statistics of the Nordic Hedge Index.

However, the “Equity Long-Only (ELO)” will be its own category at the Nordic Hedge Award.

We appreciate this may be a controversial topic with rather different views. We’d love to hear your views on the subject, in private or personal, so do reach out!

You can view the constituents of NHX ELO here: ELO Constituents

Photo by Ross Sokolovski on Unsplash

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Kamran Ghalitschi
Kamran Ghalitschi
Kamran has been working in the financial industry since 1994 and has specialized on client relations and marketing. Having worked with retail clients in asset management and brokerage the first ten years of his career for major European banks, he joined a CTA / Managed Futures fund with 1,5 Billion USD under management where he was responsible for sales, client relations and operations in the BeNeLux and Nordic countries. Kamran joined a multi-family office managing their own fund of hedgefunds with 400 million USD AuM in 2009. Kamran has worked and lived in Vienna, Frankfurt, Amsterdam and Stockholm. Born in 1974, Kamran today again lives in Vienna, Austria.

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