Barclays's new Aristo index to be used as base for structured product investors seeking alpha

By Emma Trincal

New York, Sept. 21 - Barclays Capital announced on Monday the launch of a new index the bank is planning to use as the underlying for structured products in a bid to give investors exposure to several asset classes with the potential to earn absolute returns.

Barclays Capital, the investment banking division of Barclays Bank plc, launched the Barclays Capital Aristo Index, a measure intended to reflect the performance of a strategy called Algorithmically Rebalanced Investment Strategy with Optimization.

"This new index will be used as a reference for structured products," said Samson Koo, head of equity derivatives structuring in the United States. "Since it's an investable index, we can create investment instruments referencing it."

Index of indexes

The Aristo Index combines three sub-indexes, two of which are equity-based (Q-BES and TOM) and the other, a commodity index (Combats 6).

"We found that combining these three indices in the correct proportion gives a very good diversified performance," said Koo. "There is a need for an index product that has good performance and low volatility."

In addition to being an index of indices, Koo said that Aristo had another important feature: the rebalancing process through the use of an algorithm.

Each quarter, a predetermined decision-making process algorithm determines the index allocation to the three different sub-indexes on what is intended to be an optimal risk-return profile.

The result, Koo said, is a product that shows little correlation with the respective underlying equity and commodity indexes.

"This is the first Barclays index of indices that crosses asset classes," said Graham Rennison, head of strategy indexes. "We're starting to see interest for intelligently designed combinations of strategies that provide access to different markets."

Three alpha constituents

Perhaps more important, Rennison noted, is the fact that each of the three sub-indexes is an alpha indexes, a trait that enables Aristo to be an instrument that can help its creators to deliver alpha in the equity and commodity markets for their clients.

"This is an index of alpha indices," said Rennison. "There are several indexes of indices in the marketplace that are indexes of beta indices or benchmark indices. This is not one of them. "

A benchmark or beta index gives investors an overall exposure to an asset class but investors see their performance fluctuating up or down depending on the movements of the benchmark. For instance, investors in the U.S. stock market can have pure beta exposure through the S&P 500 index.

With an alpha index, the return does not depend on the ups and downs of a benchmark, Koo explained. Investors get pure alpha, also called absolute return, or the return in excess of the benchmark regardless of the market moves.

"Each of the constituents with Aristo are alpha indices. Our three different alpha indices each target a different kind of market inefficiency. The reason we packaged them into one index based on an algorithmic rebalancing mechanism is to create a portfolio designed to generate absolute return," said Koo.

Structured products to follow

Because the demand for alpha products is so strong, Barclays hopes to sell its structured products referencing the new index to a broad base of investors, including individual and institutional investors.

"The index is designed to be investible. We will be offering products referencing the Aristo index so that investors can invest in these strategies," Koo said.

The structured products will be available in the United States and in Europe, Koo added. Depending on the jurisdictions and the form of the investment, some of the securities are already available, he said.

"It's going to be for investors who want high returns with low volatility," Koo said. He added that there will be many different ways to structure these products and that some will even be available in principal protection format.

Barclays Capital will provide data, analytics and support for the indexes, including via Bloomberg.

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