Index-Enhanced Strategy: A Better Option than Index Funds?
Index-enhanced strategies utilize quantitative methods to appropriately structure portfolio holdings based on an index with the goal of obtaining additional alpha on top of the beta return of the tracking index. The strategy is designed to have stocks that are vastly similar to the index being followed in terms of sector, industry, size and style. In other words, index-enhanced strategies seek to track an index while outperforming the index itself, rising more and falling less than the index. This is done via utilizing stock-specific knowledge to achieve incremental positive returns which are compounded over time, involving both passive and active management. Also, the strategy aims to use risk more efficiently, with an overall aim to reduce active risk.
The Strategy's Core Principle:
Index Enhancement = Volatility of the overall market (Beta) + Excess Return (Alpha)
Beta: The volatility of an instrument relative to a benchmark. A larger magnitude of Beta implies greater volatility. Most funds leverage the quantitative stock selection model to construct a portfolio of stocks tracking the index, in order to track the index to obtain market returns (with the market up and down).
Alpha: Represents the excess return provided by a portfolio (or individual asset). While tracking the index, it operates through multi-factor stock picking, new stock hitting, intraday trading, IT execution optimization to obtain excess return.
Why Index Enhanced Strategies Stand Out:
Transparent Strategy Logic: Index-enhanced strategies typically maintain a high level of transparency by having a clear set of boundaries and expectations for managing an investor’s portfolio. Under this strategy, investors can have a comprehensive understanding of the approach taken in selecting and weighing securities, thereby boosting transparency and accountability. Unlike traditional strategies, index-enhanced strategies can achieve elevated results with the same level of risk.
Diversification: Index-enhanced strategies aim to achieve diversification and exposure to different asset classes to boost returns and mitigate risk. This can be done via the employment of stock options, futures or swaps to gain additional exposure to certain market segments. Furthermore, for international portfolios, currency derivatives may be employed as well, in order to hedge or speculate on currency fluctuations to reduce the extent of exchange rate volatilities on portfolio returns.
Stronger Risk Control: The degree of active management of index-enhanced strategies is slightly lower due to the limitations of the tracking index, which correspondingly reduces the volatility of its performance. Furthermore, the strategy allows for additional filters to be enacted to eliminate certain undesirable companies such as those with unhealthy debt levels or are facing serious legal action. If an investor followed a traditional index, such undesirable companies would still be included.
Adaptability: Index-enhanced strategies can adapt to changing market conditions by using quantitative methods to alter portfolio investments based on changes such as macroeconomic conditions and market trends.
What Market Environment is Suitable for Index-Enhanced Strategies?
The suitability of index-enhanced strategies depends on various market conditions and factors:
Moderate Market Efficiency: In markets that are not perfectly efficient, active managers may be able to exploit mispricings and generate additional returns. However, if a market is highly efficient, it becomes difficult for managers to consistently outperform the index after accounting for fees and expenses.
Stable and Predictable Markets: Index-enhanced strategies can perform well in stable market environments where trends are more predictable. In such environments, it's easier for managers to make informed decisions that lead to outperformance.
Availability of Information: Markets with transparent and readily available information allow managers to make more informed decisions when enhancing an index, as they rely on research and data to identify opportunities.
Moderate Volatility: While high volatility can present opportunities for active management, it can also increase the risk of underperformance. Moderate volatility can provide ample opportunities to secure incremental gains as index-enhanced strategies involve more controlled deviations from the index or set norm.
Transparent and Liquid Markets: Index-enhanced strategies often involve frequent trading of large volumes of shares. In highly liquid markets, performing these trades will be easier and less costly, maximizing investor profits.
What MS Capital Can Offer to Investors?
Index-enhanced strategies are distinct from other active investment strategies in that it prioritizes return stability above portfolio risk and aims to outperform the market. Leading the way in the management of private equity funds, MS Capital is renowned for its creative application of AI technology and methodical approach towards investment management. It is made up of a solid founding team with a wealth of financial market trading, machine learning, and strategic modeling expertise. Their key capabilities are as follows:
• Processing Diverse Sources of Information: MS capital has access to a comprehensive range of data and statistics such as trade volumes and industry-specific sentiments, granting us the unique ability to keep up with the latest market trends and implement updated investment strategies.
• Advanced Factor Engineering: Our trading philosophy and the intricacy of our frameworks are considered by many to be at the forefront of the industry. The incorporation of genetic algorithms and deep learning allows us to encapsulate a wide array of market frequencies, from high-speed intra-day movements to long-term trends.
• World-class Talents at your Service: Our team consists of accomplished quantitative researchers and engineers and scientists at the forefront of deep learning from a diverse range of countries such as U.S., Singapore, China and U.K., many of whom hold PhDs and Kaggle competition titles.
MS Capital offers investors index-enhanced strategies along with market neutral and other alpha generating strategies in the Chinese market. With a daily trading volume of RMB 10 billion and creating over RMB 15 million in investor wealth every day, MS Capital's approach helps to mitigate market-specific macro-risks, delivering lower market risk and more stable returns to investors. In today's rapidly changing, dynamic world of AI/ML trading, MS Capital is committed to providing stable returns to its investors while continuously innovating and improving its products to serve our clients’ needs.
MS Capital is now extending its strategies and products to multiple other international markets, including the United States, Japan, India, Thailand, and more.
To learn more about MS Capital, please reach out to one of our client managers.