Structurers explore innovation in indexes as investors seek better returns, panelists say

By Kenneth Lim and Aaron Hochman-Zimmerman

New York, April 10 - Structurers are looking at more innovative indexes that offer exposure to new asset classes and investment strategies as investors seek better returns, a panel of industry professionals said at the fourth annual Structured Products Association conference in New York on Thursday.

"We have seen a proliferation of indexes in recent years," Dow Jones Indexes senior sales director for the Americas Richard Ciuba said.

New index trends have revolved around four areas, Ciuba said. The first is a search for new emerging markets and alpha exposure. Investors are now looking at indexes linked to markets in Kuwait, Bahrain and Sri Lanka that have not traditionally been common underlyings, for example.

Investors are also seeking indexes that embed active strategies, such as Dow Jones' recently launched U.S. RBP 130/30 index that uses an algorithm to mimic the long-short strategy, Ciuba said. There are also trends toward religious products, such as Islamic law-compliant shariah indexes, and customized indexes for clients.

Indexes by category

Standard & Poor's introduced its line of indexes by category, including themed, strategic, shariah-compliant and currency arbitrage products.

Its themed indexes include products concerned with global water interests, timber and forestry as well as homebuilding, according to David Blitzer, managing director of S&P's index committee.

The S&P BRIC 40 index allows investors to benefit from the growth in the emerging markets by trading an index in New York, London or Hong Kong, rather than credits or equities in Brazil, Russia or India.

S&P's strategic indexes allow investors to choose more or less alpha exposure or growth versus value indices.

A currency arbitrage index allows greater access to "a classic hedge fund strategy," Blitzer said, by mimicking the strategy in the index.

A diversification strategy

Lehman Brothers senior vice president and commodity investor sales head Matthew O'Connor said his bank has had some success with its Commodity Based Alpha Trading Strategies (ComBATS) indexes. The ComBATS strategy uses Lehman's Pure Beta strategy, which seeks to achieve a positive roll yield on commodities, and tracks its outperformance over more traditional indexes. The strategy is a diversification tool because it has historically low to negative correlation to traditional portfolio investments, O'Connor said.

"If you feel we are in a toppish environment, this might be a way for you to diversify," he said.

BNP Paribas equity derivatives director Serge Troyanovsky also noted that his bank has had success with its Spectrum and Spectrum Plus indexes, which are based on successful trading strategies. The Spectrum U.S. index rebalances its components based on a momentum strategy, and is intended to outperform the S&P 500. The Spectrum Plus index incorporates a long-short strategy and is meant to offer absolute returns.

The new indexes that incorporate algorithms offer a number of advantages to investors, Troyanovsky told Prospect News at the sidelines of the conference.

"Some of these indexes could be an alternative to hedge funds," he said. "They are also designed to have absolute returns, but there are no fees and there's more transparency."

He sees the market growing for such algorithmic indexes.

"Absolutely," Troyanovsky said. "It really allows investors to access the best trading practices in the market."

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