Tired of dull returns from traditional indexes? Try designing your own, throwing in a secret formula and maybe earning 6 percent even as the world caves in.
Tailor-made indexes that can apply algorithms are surging in popularity throughout Asia as gains from conventional assets languish. The amount invested in securities tied to such indexes has climbed to the highest since the global financial crisis, according to London-based analytics firm Coalition Development It estimates sales rose at least 30% last year.
“The driver is the hunt for yield,” said Eric Li, a director in Coalition’s research and analytics team. “When yields on traditional asset classes fall to a significantly low level, that’s when you see the emergence of these algorithm- based indexes.”
It would seem conditions are ripe. A torrid week has seen shares in the Asia-Pacific region sink to the lowest since 2012 after China’s shock yuan devaluation this month roiled stock markets across the globe. The Bloomberg Commodity Index, which tracks 22 raw materials, plunged to the lowest in 16 years as yields on US treasuries tanked to the least since April.
Amid all the turmoil, one of Asia’s most popular proprietary indexes, Credit Suisse Group AG’s SPEAR Dynamic Asia, has delivered a 5.5% gain this month. Not all have fared so well. The Swiss bank’s SPEAR Dynamic Global Index lost 2.5% in the same period. Proprietary indexes are usually constructed by banks, either by themselves or based on bespoke client requests.
Need to Adapt
“Investors need to keep in mind that in all investments, you take some view and those strategies are going to perform under certain market conditions,” said Cyrille Troublaiewitch, head of Citigroup Inc.’s multi-asset group for Asia Pacific. “When those market conditions change, investors will need to adapt their strategy investments to the new environment.”
Citi has seen sales of products tied to algorithm indexes in Asia double annually over the past three years, according to Hong Kong-based Troublaiewitch. Growth was primarily driven by institutional clients, many of which invest in hedge funds and are now looking for cheaper options as low yields magnify the impact of fees, he said.
Japanese Buyer
One of Asia’s latest proprietary index-tied offerings was a 50 billion yen ($578 million) sale of 30-year notes last month linked to Societe Generale SA’s SGVA Index, data compiled by Bloomberg show. The notes were sold to a Japanese fund, which is the underlying asset for an insurance product distributed in the nation, and comprise its main holdings, according to people familiar with the matter.
SGVA uses a mechanism that targets a specific measure of volatility, as well as momentum indicators to allocate funds in different regions such as Japan, US, BRIC nations and emerging markets, across both equity and fixed income, said the people, who asked not to be identified as the details are private.
“The strategies behind these algorithm indexes are top secrets for banks because these are what makes the money,” Coalition’s Li said. Japan, Singapore and Hong Kong are Asia’s biggest markets and China is the fastest growing, he added.
“When you look at the size of the wealth management industry in China, can they keep doing the same thing and invest in equity or fixed income to get the high yield? No. They need to diversify,” said Citi’s Troublaiewitch. “Proprietary indexes are an alternative to traditional asset classes.”
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Tailor-made indexes that can apply algorithms are surging in popularity throughout Asia as gains from conventional assets languish. The amount invested in securities tied to such indexes has climbed to the highest since the global financial crisis, according to London-based analytics firm Coalition Development It estimates sales rose at least 30% last year.
“The driver is the hunt for yield,” said Eric Li, a director in Coalition’s research and analytics team. “When yields on traditional asset classes fall to a significantly low level, that’s when you see the emergence of these algorithm- based indexes.”
It would seem conditions are ripe. A torrid week has seen shares in the Asia-Pacific region sink to the lowest since 2012 after China’s shock yuan devaluation this month roiled stock markets across the globe. The Bloomberg Commodity Index, which tracks 22 raw materials, plunged to the lowest in 16 years as yields on US treasuries tanked to the least since April.
Amid all the turmoil, one of Asia’s most popular proprietary indexes, Credit Suisse Group AG’s SPEAR Dynamic Asia, has delivered a 5.5% gain this month. Not all have fared so well. The Swiss bank’s SPEAR Dynamic Global Index lost 2.5% in the same period. Proprietary indexes are usually constructed by banks, either by themselves or based on bespoke client requests.
Need to Adapt
“Investors need to keep in mind that in all investments, you take some view and those strategies are going to perform under certain market conditions,” said Cyrille Troublaiewitch, head of Citigroup Inc.’s multi-asset group for Asia Pacific. “When those market conditions change, investors will need to adapt their strategy investments to the new environment.”
Citi has seen sales of products tied to algorithm indexes in Asia double annually over the past three years, according to Hong Kong-based Troublaiewitch. Growth was primarily driven by institutional clients, many of which invest in hedge funds and are now looking for cheaper options as low yields magnify the impact of fees, he said.
Japanese Buyer
One of Asia’s latest proprietary index-tied offerings was a 50 billion yen ($578 million) sale of 30-year notes last month linked to Societe Generale SA’s SGVA Index, data compiled by Bloomberg show. The notes were sold to a Japanese fund, which is the underlying asset for an insurance product distributed in the nation, and comprise its main holdings, according to people familiar with the matter.
SGVA uses a mechanism that targets a specific measure of volatility, as well as momentum indicators to allocate funds in different regions such as Japan, US, BRIC nations and emerging markets, across both equity and fixed income, said the people, who asked not to be identified as the details are private.
“The strategies behind these algorithm indexes are top secrets for banks because these are what makes the money,” Coalition’s Li said. Japan, Singapore and Hong Kong are Asia’s biggest markets and China is the fastest growing, he added.
“When you look at the size of the wealth management industry in China, can they keep doing the same thing and invest in equity or fixed income to get the high yield? No. They need to diversify,” said Citi’s Troublaiewitch. “Proprietary indexes are an alternative to traditional asset classes.”
Click Here To Register For Free Trial Services OR Give A Missed Call : +6531581402 Follow Us On Twitter : www.twitter.com/epicresearchsg Like Us On Facebook : www.facebook.com/EpicResearchSingapore Need Any Assistance Feel Free To Mail Us at : info@epicresearch.sg
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