Equity derivatives house

Barclays Capital

Barclays Capital can take credit for the increasing use of volatility in Europe, providing the hidden asset class in a listed form. The liquid, transparent and tradable format is attractive to investors, from hedge funds to retail, and typifies the work the bank has done in providing structured products to investors in a more palatable form.

The bank has successfully integrated the Lehman Brothers equity business, maintained and improved its presence across Europe and provided new ideas and products catering to the desire for new underlyings as well as requirements created by new regulation.

“Barclays has done an excellent job,” says Michael Übersax, chief investment officer at Active Alpha in Pfäffikon, Switzerland. “I guess that has a lot to do with taking over the Lehman Brothers franchise. They are very innovative... it used to be quite difficult for people to trade derivatives or volatility because it was down to options traders. Now you see more long-only guys, even pension funds trading volatility through more standardised products. Barclays has been very innovative with its Vix-like products where you can trade short and medium-term volatility through an exchange-traded note (ETN).”

The Investable Volatility VSXX indexes represent a constant maturity exposure managed by a self-funded VStoxx futures rolling strategy with daily rebalancing, explains Antti Suhonen, managing director of origination in the equity and funds structured (EFS) markets team at BarCap in London. “We brought it into Europe because the US and European markets do decouple; the European sovereign crisis gave a very good example of that,” says Suhonen. Assets under management in Europe are at €65 million, and a mid-term version is due to launch at the end of October. Recognising different delivery platforms, “we are also launching a VSXX Ucits fund in the next month,” says Hassan Houari, managing director in the EFS team at BarCap in London.

BarCap launched the VSXX product in April 2010 as the new industry standard for investing in European equity volatility for both institutional and retail investors. The Astro product, designed to help develop the role of equity volatility as an effective solution for tail-risk hedging, followed and has been replicated by competitors. “Because of these types of products we are taking to Barclays more and more,” says Allan Saldanha, investment manager at F&C Asset Management in London.

As well as arranging a group of market makers, the bank has written a number of papers concerning hedging with Vol Futures, as well as organising a presentation with Bloomberg and Eurex, on this topic, notes one private banker.

Innovation around volatility has included a range of solutions called Open (Open Investment, Open France) which provides, “in a volatility controlled manner”, participation of up to 200% in best-of-breed mutual funds in France, “providing serenity and performance to our customers,” says one Paris-based head of investment solutions for a retail banking operation in France.

The bank has also created Armour, in response to insurance companies adjusting to new regulations and markets. Confronted by investor demand for long-term diversified investments, Armour recognises the possibility of improving static weighting on asset classes, re-allocating between assets on the basis of their most recent trend by dynamic rebalancing from low or negative performance assets into those performing well.

Each month, the investment is divided between the two best performers of equities, bonds, emerging markets equities, commodities, gold and cash. A risk-control overlay targets a pre-defined level of volatility of returns by reducing exposure to the strategy in times of market uncertainty. Assets under management have reached £155 million since the March launch.

Swiss Life had asked a number of counterparties for a cross-asset-class quantitative strategy that would be very “transparent and nevertheless would be very attractive”, explains Peter Kaste, head of financial engineering at Swiss Life Asset Management in Zürich.

As well as providing the necessary documentation for the index, the bank helped Swiss Life with the education of its staff and with the documents it had to distribute. “They were also innovative in finding a way to help us with our long subscription period,” says Kaste.

The bank has also built out its family of quantitative indexes and strategies has helped to bring greater access and transparency to a vast number of indexes and strategies, including a selection of strategies used by hedge funds. Over the past 12 months, this has included the Q-Ma strategy, which allows investors to profit from US merger and acquisition activity. Q-Ma is the first structured product to replicate the returns of this hedge fund strategy and has raised US$178 million in Europe since May from two pension funds and a major hedge fund. The methodology was finalised in January, with the strategy up 9.73% by the end of August, compared to the 1.19% gain for the HFRX merger arbitrage benchmark.

BarCap is planning to convert the strategy into an indexas well as offering the strategy through a fund or ETN.

Click here to view the article in PDF format