Guaranteed Enhanced Indexing - Its Simplicity and Locked-in Alpha Make It Worth a Look

Abstract

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.

GEI products are fundamentally different than traditional enhanced indexing strategies. Aside from nominal credit risk and lack of liquidity, however, GEI options carry none of the risk issues or concerns associated with more traditional options. This simplicity, combined with no-fee, no-tracking error, locked-in positive alpha, makes GEI worthy of exploration as a supplement to a core indexing strategy.

Keywords: Guaranteed, enhanced, indexing

JEL Classification: G22, G23