New FTSE, AlphaSimplex Indexes Target Risk

January 25, 2011

FTSE Group, the global index provider behind thousands of benchmarks worldwide, launched a series of indexes in partnership with Andrew Lo’s Cambridge, Mass.-based investment advisor AlphaSimplex Group that are designed to capture long-term expected returns in a risk-controlled environment.

The FTSE StableRisk Index Series taps into four asset classes—equities, commodities, currencies and interest rates—through liquid, long-only futures contracts in each asset class. The benchmarks are rebalanced as often as daily in an effort to keep volatility in check as well as risk exposure stable, the company said in a press release. A separate index for each asset class is calculated, as well as a composite benchmark comprising all four asset classes.

Separately, the company is launching the FTSE StableRisk Trend indexes, which are similar to the StableRisk Index Series in construction, but also take into account momentum and that hold both long and short futures contracts in the portfolios.

The trend indexes, by keeping long positions in assets that are trending higher and short on those trending lower, strive to capture long-term exposure to “rewarding risky assets” while mitigating volatility often seen in market downturns, the company said.

The launches of new benchmarks by AlphaSimplex are part of a broader trend of new investment tools coming to market that are designed to manage volatility and risk as investors look for ways to grapple with the choppy economic recovery since the market crash of 2008-2009.

“The dynamic nature of market risk can lead investors to take much greater risk than they want or expect,” Lo, also a professor at the Massachusetts Institute of Technology, said in the release. “We think that the new FTSE indexes eliminate the false choice between risk-control and index tracking error.”

 

 

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