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Leverage a boutique research team

Situation

Client: Quantitative Equity research team within an international investment bank
Problem: Research models and research documents used on an ad-hoc basis by sales teams and Research team needed to demonstrate its contribution to the bank’s bottom-line.
Request: Build a quantitative alpha strategy decorrelated with the equity markets which could be offered off-the shelf continuously to a broad universe of investors (retail to institutional).
Restriction:The bank needed to be able to track and hedge any products following that strategy, without new IT or headcounts investments. The rather complex alpha generating engine needed to be simple enough to explain to all types of investors.

Solution

Developed jointly with the quant team in the investment bank a tailor-made index, called an ‘alpha index’ consisting of a long and a short leg.
The index has been designed so that it can be tracked by the bank’s own trading teams and using the bank’s existing IT infrastructure. Marketing of the index involved inside training, development of sales pitches in accordance with the bank’s high standards, and joint visits to key investors.

Result

The client has sold large amounts of structured products for various clients across Europe, and still is doing so today. This has had an immediate effect on the client’s bottom-line.
Furthermore, the client has been using the index as a means to market itself, enhancing its visibility and franchise.
The client is regularly using the quant team to develop new strategies for end-investors.

In depth analysis of the index and product creation process

Custom Index Creation Process
- Vetting of factors and models used in order to check whether the strategy could effectively be transformed into a custom index
- Simplification and automation of some of the investment processes for trading purposes:
  - definition of selection universe according to trading capabilities and liquidity constraints
  - advised on sector and market neutrality in the alpha engine process
  - shrinkage of portfolio in order to control turnover and enhance tracking
  - decision on calculation methodology, fees, dividend treatments, minimum and maximum shorting costs and transaction costs
  - documentation and back-testing
- Optimization of the index for stability and derivative hedging:
  - development of a layered volatility control mechanism: dynamic exposure to the strategy depending on both markets’ and the strategy’s own volatility
  - reduced option pricing via a cash netting mechanism in the index
- Finalize index documentation and publication process
  - rules book including event driven procedures
  - appointment of calculation agent
  - electronic publication of index level and performance figures
Product Creation Process
- Design of different solutions linked to the new custom index
  - option based solutions (standard and more exotic)
  - unfunded swaps on the alpha index (no cash required)
- Advise on wrapping alternatives
  - tax, legal and regulatory constraints
  - unfunded strategies
  - secondary market price and liquidity
- Assist in the creation of marketing material
  - index marketing material
  - product marketing material

IN THE NEWS

17 Apr 2012 - Finvex Group and Vicap agree to co-operate
12 Mar 2012 - Finvex Group quoted in international financial press
7 Sep 2011 - Rabobank International and Finvex Group enter into a strategic co-operation

PUBLICATIONS

17 Apr 2012 -Finvex Group second white paper on Risk Optimized Investing in Equity Markets
24 Apr 2012 - Finvex Group joins Rabobank in IPE web based seminar on smart investing

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