" Indices that are value- weighted, as opposed to equally weighted, may take on return chracteristics of the best performing hedge fund over a given period"

Can anybody eaplian this?

" Indices that are value- weighted, as opposed to equally weighted, may take on return chracteristics of the best performing hedge fund over a given period"

Can anybody eaplian this?

It is talking about the usage of value of each fund for the calculation of the index value.

Extreme high values have a tendency to drive the index value upwards.

cpk,

It’s still not clear to me.

look at how a value weighted index is calculated.

and how the value index will go up when the value of some of the individual firms forming the value index goes up.

I believe there is a calculation of value weighted, price weighted and equal weighted in the equity chapter. same concept.

2 firms $100 each - value index = $100

1 of the firms rises up to $200 the other remains at $100 -> value index = $150 – moves up towards the higher value firm.

even if one firm falls to 25% - value is still 62.5 - closer to 100 than to the 25 (lower value)

This is the same stuff you learned about equity indices at Level I.

Price-weighted indices are biased toward the companies with the highest share price: a 1% change in a $100 stock has 10 times the effect as a 1% change in a $10 stock.

Value-weighted indices are biased toward the companies with the largest market cap: a 1% change in a $100 million cap company has 10 times the effect as a 1% change in a $10 million cap company.

Equally-weighted (unweighted) indices are biased toward small companies because their stock prices tend to be more volatile than the stock prices of large companies.

So it is with stock indices. So it is with hedge fund indices.

Thanks guys. The wording was confusing to me.

You’re welcome.