Security Index Question Bugging Me...

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SpareTime

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From CFAI
32. A unique feature of hedge fund indices is that they:
A. are frequently equal weighted
B. are determined by the constituents of the index
C. reflect the value of private rather than public investments.
I answered C, but the answer is B. The explanation in the textbook doesn’t explain a thing.
Obviously it’s not A. Also, I know that indices are determined by the constituents of the index, but how is that UNIQUE to hedge fund indices? Are not all indices determined by the stocks within them?
 
It’s not a well-worded answer.
What they mean is that each hedge fund gets to decide whether they will be included in the index; if they don’t want to be included, they’re not.
McDonalds doesn’t get to decide whether they’re included in the S&P 500; S&P decides that. (I suppose that McDonalds could decide: they could stop selling hamburgers until they shrink to only the 501st-largest, but that’s not really the same thing.)
 
Ok that’s what I was thinking…but then I thought, do they really get to decide whether or not they’re in the index, or do they just get to decide whether or not they send the information? Wouoldn’t it still be up to the creator of the index to decide which hedge funds were placed in the index? The only difference was that they would have a smaller pool of funds to choose from (those that report their results).
I also have one other question from the same reading that I’m hoping is an error. However, my computer is not letting me open the Level I errata so I can’t view it to see if it is.
23. Uses of market indices do not include serving as a:
A. measure of systematic risk
B. basis for new investment products
C. benchmark for evaluating portfolio performance
The answer is A. Security market indices are used as proxies for measuring market or systematic risk, not as measures of systematic risk.
Is one of those “systematic risk” in the explanation supposed to say “unsystematic risk”? Because otherwise, it makes no sense to me. I answered B (process of elimination…I don’t really know what B truly means), because I felt like indices could be used as indicators of systematic risk - since they could diversify away all unsystematic risk, and the standard deviation of the index’s returns would be a measure of the index’s systematic risk.
 
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