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The authors review the arguments put forward by the Lhabitant (2006) paper, in particular whether the problems that are outlined for hedge fund indices do also exist for other indices that seem to be widely accepted. They conclude that the limits of hedge fund indices that the Lhabitant (2006) paper points out indeed exist. However, solutions to the problems of hedge fund indices exist.
The authors point out in this paper that:
Therefore, it is perhaps surprising that the Lhabitant (2006) paper argues that hedge fund indices should currently not be allowed as eligible for UCITS. This document shows that indices for other asset classes, and most notably stock market indices, face the same type of limitations and problems that hedge fund indices face. It is unclear on what basis hedge fund indices should be subject to discrimination compared to indices for other asset classes.
Rather than denying official recognition of any hedge fund index, a more promising approach would be to accept hedge fund indices in principle and to require a number of quality criteria. Such an alternative of ensuring the respect of certain quality criteria for eligible indices seems to be more convincing than to either reject hedge fund indices on the basis of their shortcomings or to make all hedge fund indices eligible without considering the specific quality of each index. Wide use of high quality hedge fund indices for investment and risk analysis would mark an important step towards proper information for investors on the level of risk in hedge fund products.