Index innovation of the year: Barclays

With investors demanding a more thorough approach to investing and increasingly viewing investments as systematic sources of risk and return, Barclays has focused on the development of tradable indexes that capture liquid alternative risk premia across all asset classes and investment styles, from long-only access to credit markets to market-neutral equity market investing.

"We have seen large pension funds, for example, implement strategies of alternative risk premia by combining them across different asset classes," says Anthony Lazanas, head of portfolio modelling and index strategy at Barclays in New York. "They realise there is a real economic reason for the existence of these strategies, and are starting to include them in their portfolios."

Barclays' clients include asset managers, exchange-traded fund providers, investment consultants and other market participants. The bank stands out among its competitors in terms of its creativity in index construction, according to one New York-based client, while another says it has done a great job of understanding the market.

The bank's latest innovation is the Barclays High Yield Investment Grade Spread Index family (Hyigs). Launched in November 2012, the index series seeks to extract value from the risk premium that exists in the spread between high-yield and investment grade indexes. It is the first index family to exploit that spread, according to Lazanas. The strategy applies signals that indicate when it should become more aggressive, he says.

The Hyigs Beta Index is a static strategy designed to capture the carry between high-yield and investment grade markets by taking a long position in high yield and a short position in investment grade, according to the bank. The Hyigs Enhanced Beta Index is based on the Beta Index but adds a risk-aversion signal to increase or decrease the leverage on the short investment grade leg with the aim of adapting to changes in the risk environment and reducing drawdowns. The dynamic version of the index family - the Dynamic Hyigs Index - is also based on the Beta Index but uses a set of three signals - risk aversion, relative value and spread trend - that determine whether to increase or decrease the leverage on the short investment grade leg.

Barclays has also launched a tail-risk-hedge version of the index that is designed to provide downside protection for beta portfolios during risk-off periods by going short credit indexes. The Hyigs indexes have so far been offered in a total return swap format, according to Lazanas.

Improving traditional investment themes with innovative strategies has also been a priority for Barclays, he says. The Shiller Barclays Cape US index family, launched in September 2012, caters to increased appetite for adapting well-known investment strategies to improve their risk characteristics.

The strategy rests on the assumption that it can identify overvalued and undervalued sectors among 10 US equity sectors. Developed in collaboration with Yale professor Robert Shiller, it is an equity sector-selection strategy that uses a variant of the cyclically adjusted price-to-earnings (Cape) value metric - the relative Cape. The adjusted version of the metric allows it to be more comparable across sectors, says Lazanas.

The Shiller Barclays Cape index family comprises three strategies - US Sector, US Sector Tilted and US Sector Market Hedged. So far, the strategies have been sold both as a total return swap and an exchange-traded note (ETN), says Lazanas.

In response to investor demand for uncorrelated returns and diversification, Barclays also created a number of portfolio strategies last year. Its multi-asset index family, Optimo, was launched in April 2012 and reflects the performance of a multi-asset allocation strategy that allocates 40%, 30%, 20% and 10% to the four highest-ranked assets from a universe of seven asset classes, based on historical Sharpe ratios.

The bank's latest volatility trend index, the Barclays Cross-Asset Risk Premia, is a tradable index designed to seek diversified exposure to risk premia across investment styles and asset classes. The index tracks the value of a portfolio which is a volatility-weighted combination of 16 systematic indexes which together have over $4 billion in AUM. The bank completed a C$20 million total return swap on the index for a Canadian pension fund. "It has taken on a life of its own because of its fantastic performance," says Lazanas. The index is up almost 10% this year and 40% over the past two years, he adds. The index comes in three versions which include volatility targets that range from 5% to 7%.

Barclays also added to its commodity and foreign exchange offerings last year. In November, it launched the Commodity Liquidity Timing Index, which exploits liquidity risk premia from a diversified basket of commodities. A month earlier, it launched the Month-End Rebalancing Currency Index, aiming to capture forex spot moves caused by month-end forex hedge rebalancing activity, which, in turn, is caused by equity and bond market movements.