Guaranteed Enhanced Indexing : Its Simplicity And Locked-In Alpha Make It Worth A Look

Overview: Guaranteed enhanced indexing (GEI) is an insurance-based approach to enhancing index returns. As its name suggests, alpha performance is contractually “guaranteed” by the insurance company issuing the contract. This strategy represents a fundamentally different way to achieve index alpha, compared to traditional “best efforts” approaches, and offers the potential for even higher information ratios—the value added per unit of risk. Nevertheless, GEI remains, so far at least, little known and little-used, accounting for only a tiny $2 billion sliver of the enhanced indexing pie. The objective of this article is to provide a structural overview of guaranteed enhanced indexing and to delineate the differences between GEI and traditional enhanced indexing strategies. The GEI strategy uses an insurance contract that guarantees to the contract holder the total return of the selected benchmark index, plus an annual enhancement, with no money management or transaction fees of any kind. Since GEI represents a small asset class, there are generally few index types currently available. From the issuing insurance company’s perspective, GEI is not an investment fund or even an indexing product. It is a straightforward spread management product. The insurer’s profit is the spread between what it can earn on the asset side of the balance sheet and what it must pay out on the liability side. As with any spread product, the issuing insurance company is obligated to pay GEI liabilities regardless of what it earns on the assets backing the contract.

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Format: HTML | Date: Jan 2003 | Pages: 5