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Interview with Zubin Ramdarshan: Eurex lists European factor futures

Release date: 04 May 2017 | Eurex Exchange

Interview with Zubin Ramdarshan: Eurex lists European factor futures

By Helen Bartholomew

Source: Reuters

LONDON, May 4 (IFR) - Eurex has listed its first contracts linked to iStoxx European equity factor indices, allowing investors to trade six individual risk factors in futures format.

The indices, which were developed in collaboration with independent asset management firm Alpha Centauri, allocate to alternative sources of beta in an attempt to deliver equity-like returns with low correlation.

Academic research suggests that equity returns can be explained by factors that are supplemental to the market risk. While some literature points to as many as 150 factors that drive equity returns, the latest contracts offer exposure to the six core risk factors; size, value, carry, momentum, low risk and quality.

"A growing number of our clients are turning to factor investing as a way to generate returns passively," said Zubin Ramdarshan, head of product R&D equity and index at Eurex. "Now with futures on Eurex, our clients can implement their views while hedging their positions."

The exchange executed its first lots on Wednesday - the first day of listing - as more than 3,600 iStoxx Europe Momentum Factor Futures traded.

The listing adds to futures on MSCI North America factor indices that are already traded on the Frankfurt-based exchange.

"We've been aware of demand for European factor exposure for a while and we wanted to have a robust reliable benchmark provider," said Ramdarshan. "It's important for us to understand the methodologies and make sure we were referencing the right provider for the European region."

Futures markets have lagged behind exchange-traded funds in offering investors access to individual risk premia, but the contracts are seen as a crucial development, providing investors with the opportunity to take long and short positions with ease, and lending themselves to strategies that weight factors based on signals from a variety of macro factors.

While many ETFs track bank proprietary indices, the latest futures contracts offer exposure to transparent benchmarks that publish full methodology. The contracts also offer efficiency benefits associated with futures markets including price discovery, central clearing and margin efficiencies.

Back tests show that all the iStoxx single factor indices provided excess returns relative to the Stoxx Europe 600 benchmark over a period of 11 years, with correlations ranging from -0.71 (low risk) to a maximum of 0.03 (value).

Research from Alpha Centauri suggests that investors can enhance the factor isolation by pairing a long position in the futures contracts with a short position on Stoxx 600 futures.

"We view the futures as part of an active management mandate where investors may be looking for a more efficient instrument to implement a factor strategy," said Ramdarshan.

"Factor-driven investing is an active decision but it's part of that evolution of passive investing where there's an overlay of a quantitative screening to complement the passive approach."


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