(Bloomberg News) Barclays Capital plans to sell notes based on a proprietary index that allocates investments according to a computer model, as the number of so-called quantitative benchmarks grows.
The Multi-Alpha Equal Risk Allocation Index, or Era, is the second quantitative index released by Barclays in the past month, joining a growing list of products based on strategies where mathematical models are used to determine where to allocate assets.
Era uses an algorithm developed by the London-based bank to measure historical volatility and determine how to invest across four asset classes including stocks, commodities, interest rates and currencies, according to Barclays Capital.
Barclays's Astro, an equity trading strategy started in September, will be linked to "hundreds of millions" of dollars of notes, said Laurence Black, the bank's head of quantitative investment strategies. Astro uses a formula based on so-called mean reversion, the theory that equity prices revert to an average level, to allocate investment between cash and equities.
Other banks have offered similar deals. Royal Bank of Scotland Group Plc said in August it expects to raise 750 million pounds ($1.2 billion) by year-end from the fifth series of its Autopilot and Navigator index-based notes. Autopilot invests in stocks, commodities and property when prices rise, and U.K. inflation-linked assets when markets fall. Navigator uses moving averages to determine when to buy or sell U.K. stocks.
Stoxx Ltd., the Zurich-based equity index provider, started an equity benchmark in September that aims to keep volatility at 20 percent by allocating assets to stocks when price swings moderate, and more to money rates as fluctuations increase.
"Banks issue a lot of products because their cost of production is quite low and they are often competing with other products, without necessarily adding much value," said Paul Thind, head of structured solutions and ETFs at C-Quadrat, the Vienna-based fund manager that last month started exchange- traded funds on two quantitative indexes targeting returns as high as 20 percent.
The performance of quantitative indexes has been mixed this year. Barclays Capital's Combats 6 commodity index has dropped 0.5 percent, its QBES U.S. large cap equity index has fallen 3.4 percent, while the bank's Atlantic Exceed, a fixed-income index, increased 0.8 percent, according to data compiled by Bloomberg.
Meantime, RBS's Autopilot index has fallen 11.3 percent, and Navigator has declined 8.7 percent.