to add value is the composition of the investment universe. Many traditional active managers are allowed to purchase only those securities that are part of their performance benchmarks. Since hedge fund managers do not have performance benchmarks, they are not limited in the same way. For example, a hedge fund manager and a traditional active manager may each have strong positive views on a particular security. Unless that security is part of the traditional active manager's investment universe, he or she may not be able to hold the stock in the portfolio. Finally, although most hedge fund managers stick to one investment style, they are not necessarily restricted from making changes. Traditional active managers, by contrast, are usually restricted to the investment style for which they were selected. Consequently, a hedge fund manager has the ability to more quickly change portfolio characteristics to reflect changes in market conditions. For example, a hedge fund manager would potentially have the ability to switch from growth to value stocks, depending on the market cycle, in a way that a traditional active manager who is categorized by style cannot. Similarly, hedge fund managers may be able to dynamically adjust the level of market exposure in a way that a traditional active manager may not. (See Litterman and Winkelmann, 1996.) Thus, hedge fund managers could have the potential to generate outperformance through market timing that traditional active managers may not. HEDGE FUND DATA Determining the appropriate benchmark for a hedge fund has been a topic of some debate. Because hedge fund returns are driven more by human skill than by long-only indexes, each hedge fund's returns are as unique as the individuals who generate them. Despite this challenge, however, it is important to know how a manager's performance ranks against that of other managers who invest using similar methodologies and assets to express their views. For this reason, there has been a growing demand for hedge fund indexes and subindexes that can be used to gauge a manager's relative performance. Importantly, these indexes do not typically pass the tests that would be required for them to be considered to be benchmarks-for many, either constituents or constituent weights are not known in advance, and some contain funds in which investors cannot place capital. There are several major hedge fund index providers that provide index and subindex performance information. Among these are Hedge Fund Research (HFR), Credit Suisse First Boston/Tremont, Altvest, Mar-Hedge, Van Hedge, Hennessee, and FRM/MSCI. In our judgment, there is no one "best" index that addresses all concerns. Prior to using any particular index, we recommend that great care be taken to understand the index's strengths and weaknesses, as well as the construction methodology. Self-Reporting Biases Hedge fund managers are not allowed to solicit business, so presence on a hedge fund database, and in an index, represents an opportunity to raise a fund's profile among potential investors. Consequently, in most hedge fund indexes the managers