13 Sep 2012, Hannah Collins, Structured Products
Doing business in Asia as a European bank is far from easy. Not only are investors increasingly concerned about counterparty risk, but the credibility of Europe's banking system has been shot at from a multitude of angles over the past few months. In addition, especially when it comes to competing on the index side, banks are up against independent providers known for their benchmark indexes.
Société Générale (SG) has managed to navigate this tough terrain through a commitment to what it does best: rules-based proprietary cross-asset indexes. "We've had to fight hard so that clients understand the SG strategy," says Julien Lascar, the bank's Hong Kong-based director of cross-asset solutions and head of distribution and equity solutions for Asia-Pacific. "The market is extremely challenging and we've been working hard to define strategies that bring performance to the client."
The bank caters to a diverse clientele in Japan, South Korea, China and Australia, across institutional money, private banks and high-net-worth, designing both flagship and custom indexes. In the past 12 months, SG has raised more than $3 billion across its various indexes. It was lauded as a leader in index innovation by one Melbourne-based institutional investor, which is now considering more of the bank's strategies.
Priding itself on its ability to offer exposure to asset classes in new ways, SG decided to take volatility as an asset class a step further. "We had to compete with a lot of other index providers, so we needed to make a difference with this asset class," says Lascar. "At the time, everybody was playing pure beta."
Combining alpha and beta is at the heart of SG's play on volatility, however. Initially calculated in March 2011, the SGI Vinci ER Index aims to provide a hedge against falling equities by providing leveraged exposure to the implied volatility of the S&P 500. The beta component goes long Chicago Board Options Exchange Market Volatility Index (Vix) futures according to an optimised roll methodology, while the alpha strategy combines a long-short strategy: long the beta strategy and short the position on the standard roll strategy.
"The problem with volatility is the cost of maintaining the exposure," says Lascar. So the bank uses a smart future roll strategy, which, instead of always being exposed to short-term futures, which can be expensive, also allows exposure to long-term futures. The alpha strategy that is then built on top of this gives the index the potential to perform even when volatility is flat, he says
The index gives investors leveraged exposure to volatility by leveraging both positions of the alpha and beta strategies. "We rebalance the exposure between alpha and beta on a daily basis, based on a trend-following strategy that enhances or lowers the leverage in the index," says Lascar. An Australian institutional client took a $100 million exposure to the index, representing 7% of the client's portfolio at the time the trade was put in place.
A custom index developed last year for a Japanese life insurer that was seeking an investment strategy to offer as a life insurance product combined baskets of equity and bond indexes, a zero-coupon bond denominated in yen and a deposit. The index dynamically allocates between the different components according to a momentum indicator based on the trend of the equity component.
Over the past 12 months, the index has risen by roughly 7%, according to Antoine Broquereau, Hong Kong-based managing director and head of the Asia-Pacific cross structuring group at SG. Investors also benefit from a ratchet on specific products where the guarantee increases every time the index reaches a certain level, usually set at 5%. "This has been a big success in Japan, which is a savings market," says Broquereau.
Elsewhere, a bespoke index offering emerging markets exposure through both fixed income and equities was the directive from a client in Australia. "An Australian asset manager was looking to further its exposure to emerging markets, but not through a mutual fund or an exchange-traded fund vehicle," he says.
Structured as an index of indexes, it dynamically allocates between an emerging equities and a fixed-income index, using a risk-control mechanism as an overlay. The momentum strategy dynamically allocates between the underlying indexes, and both the volatility and the maximum exposure to the momentum strategy is pre-agreed with the investor. So far, SG has closed a deal on the custom index for just under $21 million, through the issuance of pure delta one certificates.
Even within the commodity sector, SG offers dynamic exposure through another of its flagship indexes. The SGI Smart Neutral Commodity Index is exposed to energy (60%), industrial metals (10%) and agriculture and livestock (30%), and is equally exposed to a roll-optimised long position and a roll-static short position in each commodity market. There is also a volatility target mechanism that aims to keep volatility close to 6%, and the index is up 1.02% in the year to date.
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