Barclays to price its fourth CDs tied to Elkhorn DWA Tactical Tilt 5% Vol; note to come soon

By Emma Trincal

New York, Jan. 13 – Barclays Bank Delaware plans to price 0% certificates of deposit due Jan. 26, 2023 linked to the Elkhorn DWA Tactical Tilt 5% Volatility Target index, according to a term sheet.

The index created last summer has already been employed as underlier for several market-linked certificates of deposits. A structured note is being considered for issuance soon.

The payout of the CD will be par plus 160% of the index return, subject to a minimum payout of par.

The index, created by Elkhorn and launched on Aug. 31, derives from the proprietary “relative strength” methodology of Dorsey, Wright & Associates.

Barclays next again

“This is going to be our fourth CD on this index,” said Fabrice Hugon, senior managing director, structured products at Elkhorn Investments and former head of equity derivatives sales of BNP Paribas in New York.

“We did our first two in November and a third one last month. They were all issued by Barclays.

“Now, we’re looking into doing a note sometime for the first quarter. It will be the first one. The notes will be done with Barclays as well.”

Dorsey, Wright & Associates LLC is an independent provider of technical analysis research for financial professionals.

“The Dorsey Wright strategy is phenomenal,” an industry source said.

“It has a good track record and a good name. They have a huge following in the RIA community.”

Massive tournament

Relative strength is a momentum strategy, which measures the price performance of a security versus others in order to find which security has underperformed or outperformed the rest of the universe.

Dorsey Wright uses relative strength as one of its “key” concepts, according to the firm’s website.

“Before investing in UPS, one should understand its recent performance relative to FedEx, or the S&P 500,” according to the website.

“A relative strength matrix is like a massive tournament, where a huge quantity of investment options can be compared to one another – and we see who is strongest.”

The notes will provide notional exposure, on an excess-return basis, to the Elkhorn Tactical Tilt index while targeting a volatility of 5%, according to the term sheet.

Using the Dorsey Wright methodology, the index tracks a dynamic notional portfolio selected from a universe of 25 components, including exchange-traded funds, indexes, currency exchange rates and cash.

The components represent the six asset classes included in the base index universe: U.S. equity, international equity, fixed income, currency, commodity and cash. The model selects the asset classes that have demonstrated outperformance characteristics in the recent past, as determined by the Dorsey Wright methodology.

Vol. control

“The strategy itself is good,” said an industry source.

“But they use a volatility control overlay to keep the options cheap. You’re dampening the return of a pretty good strategy. I know they probably need to do that to put it in a CD wrapper. But it’s a seven-year holding period and that’s a long time.”

Hugon said that volatility control was one of the most commonly used tools at the disposal of structurers in order to deliver alternative strategies in fully principal-protected products, especially CDs.

“Given the level of interest rates, everyone knows that it’s impossible to structure a CD without the vol. control component,” he said.

“All of the CDs based on those strategy-oriented indexes have to and do use the vol. control whether you’re talking about the Morningstar Ultimate, the GS Momentum Builder, the Efficiente. All of them.

“It’s just a consequence of low interest rates. If rates were high, everybody would be happy to do principal-protection, point-to-point on the S&P. But this is not the reality that we have in this market right now.”

A market participant agreed.

“Any kind of volatility control is something that can reduce or increase returns. It’s not a bad thing. It’s just a technique that’s used all the time,” he said.

“Whenever you want to reduce risk you have to reduce the returns. You can’t have it both ways.”

Bonds

One risk related to the index disclosed in the term sheet was the “substantial exposure to fixed-income, which stands as a rule. The asset class will have to have a minimum weight of 40% at all times regardless of its performance or ranking under the relative strength methodology. The index rebalances monthly.

As a result, the strategy is sensitive to interest rates or declining credit quality, according to the term sheet.

Barclays is the agent. Incapital LLC is distributor.

The CDs (Cusip: 06740FCQ9) will price Jan. 22.

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