Solactive launches European equity market neutral strategy index

Sep 19th, 2016 | By | Category: Equities

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Boutique index provider Solactive has introduced the Solactive European Quality Market Neutral Index, an equity market-neutral hedge fund strategy index that endeavours to increase in value regardless of the directional movement of the broader market.

Solactive launches market neutral index tracking European quality stocks

Henning Kahre, Head of Research, Solactive AG.

The index is constructed by matching a long position in the Solactive European Quality Index with a short position in Euro Stoxx 50 Index futures.

The approach combines a fundamental quality framework of rules-based stock picking with a market-neutral approach aimed at offsetting portfolio sensitivity to systematic risk. Investors are thereby able to stabilise volatility while capturing outperformance of the selected stocks versus the market.

The Solactive European Quality Index selects companies based on three fundamental microeconomic criteria. Each firm is ranked according to a combined score based on their return-on-equity (50%), debt-to-assets ratio (25%) and dividend yield (25%) with the top 50 firms forming the final portfolio which is equally-weighted. Sector constraints of a minimum of one and a maximum of seven constituents are applied.

Return-on-equity measures the efficiency with which a company generates profit for its shareholders, lower debt-to-assets indicates greater financial model sustainability and resilience of financial performance, and higher dividend yields indicate greater financial health and a greater ability to return value to shareholders.

The short position in Euro Stoxx 50 Index futures effectively beta-hedges the stock-picking strategy, compensating for adverse market movements. The index will still produce positive returns in downturned markets so long as the Solactive European Quality Index falls by less than the Euro Stoxx 50 Index; however, even if both indices trend upwards but the Euro Stoxx 50 Index rises by more than the Solactive European Quality Index, the return on the market neutral index will be negative. The short exposure to Euro Stoxx 50 Index futures is adjusted on a monthly basis.

As of 13 September 2016 the index is flat year-to-date and up 2.8% per annum over the past five years.

Performance: Solactive European Quality Market Neutral Index Source: Solactive AG.

Performance: Solactive European Quality Market Neutral Index
Source: Solactive AG.

Henning Kahre, Head of Research at Solactive, commented: “The Solactive European Quality Index was created with the idea of leveraging on the long-term potential of certain quality criteria to the benefit of future performance. The Solactive European Quality Market Neutral Index refines this index concept by adding a hedging strategy that can appeal to investors that want to avoid directional market exposure.”

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