Equity Index Derivatives

Country versus Sector Rotation after the Introduction of the European Monetary Union (EMU)
The introduction of the European monetary union (EMU) led to a convergence of the participating countries in many ways. One particular aspect is the diversification potential among different financial markets. While during the 1990s country effects typically dominated industry effects in magnitude, more recent studies stress the importance of industry diversification when it comes to portfolio construction. We show the increasing correlations among countries\' equity market returns and the contemporaneous decrease in sector correlations and confirm the growing importance of industry effects by applying a bootstrapping method. Supported by this finding we implement momentum strategies based on countries and industries, respectively, in order to compare their performance. Due to the better diversification potential, most of the sector models outperform the country frameworks on a risk adjusted basis.

Eurex Derivative Products in Alternative Investment - The Case for Managed Futures
This report provides an update on the potential benefits of incorporating Eurex futures contracts in CTA programs. In a previous report it was shown that incorporating Eurex futures contracts in trendfollowing programs would have improved the performance of CTAs employing those trading techniques over the period 1992-2002. This report covers the period 1992-2005. Results show that the Eurex futures contracts continue to provide the benefits illustrated in the previous report. Results also show that these strategies would have improved returns and lowered volatility for an investor holding a typical stock/bond portfolio. Although global equity indexes are highly correlated the returns from momentum strategies employed in these markets are surprisingly different. In particular, a 40% allocation to Eurex futures contracts would have resulted in similar volatility levels as an equity portfolio with a 200 basis point increase in annualized returns.

Replicating Hedge Fund Returns Using Futures - A European Perspective
Hedge funds tend to put a lot of effort into generating their returns and charge substantial fees to do so. However, with the latest performance evaluation studies indicating that hedge fund performance is not truly superior (anymore), the question arises whether it is possible to generate similar, hedge fund-like, returns in a more mechanical way and with less effort. In other words, is it possible to design dynamic trading strategies, mechanically trading stocks, bonds, etc., that generate hedge fund-like returns? If such strategies indeed exist, then this would solve a respectable number of problems surrounding hedge fund investments and alternative investments in general, including the need for extensive due diligence, liquidity, capacity, transparency, style drift and regulatory problems, as well as excessive management fees. In this paper we develop and demonstrate the workings of a technique that allows the derivation of dynamic futures trading strategies, which generate returns with statistical properties similar to hedge funds. Trading nothing else than Eurex DAX 30 and Euro Bund futures, we show that this technique is not only capable of replicating fund of funds returns, but is equally capable of replicating individual hedge fund returns. Accurately replicating the risk-return profile, but sharing none of the drawbacks of real hedge funds, our synthetic hedge fund returns are a worthwhile alternative to direct hedge fund investment.

Portable Alpha and Portable Beta Strategies in the Euro Zone
In this paper, we show how portfolio managers in the Eurozone can benefit from using derivatives markets to actively manage their asset allocation decisions in a systematic manner. Using a robust econometric process based on a non-linear multi-factor thick and recursive modeling approach, we report statistically and economically significant evidence of predictability in Dow Jones EURO STOXX 50 excess return. These econometric forecasts can be turned into active portfolio decisions and implemented via Eurex equity index futures to generate active asset allocation portable alpha benefits. We also show that adding active sector rotation decisions to asset allocation decisions allows one to significantly lower the portfolio volatility as a result of the benefits of bet diversification. We finally explain how active portfolio managers can benefit from using suitably designed Eurex option strategies as portable beta vehicles. In particular, option portfolios can be used to enhance the performance of tactical asset allocation programs by consistently adding value during the periods of low volatility when timing strategies are known to perform rather poorly. (For the complete abstract please refer to the paper.)