Technically, these strategies have a lot of similarities with traditional (beta) indices, such as S&P 500 or DJUBS. But their focus is typically less on representing a certain market, but rather on generating returns. They are segmented in enhanced beta and alpha strategies. The lines can be blurry at times though.
Unlike CTAs and managed futures which have trading systems that can be fine tuned and re-calibrated at any point in time, Trading Strategy Index rules are set in stone and cannot be changed once they are published.
There are several reasons for the proliferation and success of such strategies: On the supply side there are investment banks, that typically do not have an asset management licence and cannot offer discretionary management to their clients. So Trading Strategy Index based products became a welcome way to tap the asset management market with a new product. The fee structure is also often more akin to Mutual Funds or Hedge Funds and allows banks to generate ongoing revenue streams.
Selling products with 3rd party asset managers does happen sometimes, but this is not the normal focus of their sales force and often puts the investment bank into an unwanted competing position with their asset management division.
On the demand side sophisticated clients may want to have access to very specific trading strategies, without having to set up extensive execution and monitoring operations. Especially real money investors are often not keen on setting up complex futures trading operations that require a full time trader to watch and roll the positions. Trading Strategy Indices can also allow clients to access markets that they may not be able or willing to directly trade in. Also when clients started to get a better grasp of some of the more simple trading strategies applied by hedge funds, they were seeking for ways to access them at lower costs.
In a world where many hedge funds are still charging “2% + 20%” or “1.5% + 15%” there is ongoing demand for products that apparently offer similar risk and returns at a fraction of these costs.
The strategies employed cover a wide range. Some incorporate simple strategies, such as momentum, some offer a tweak on standard indices and others run complex optimisation strategies.
Clients looking to get exposure to Trading Strategy Indices, find a large offering of various strategies in different asset classes and different wrappers. This blog aims to provide some clarity in this topic.