"Risk Efficient" Index Series Debuts

January 18, 2010 (PLANSPONSOR.com) – Index provider FTSE Group and the EDHEC-Risk Institute have launched a new set of “risk efficient” indexes.

According to a press release, the FTSE EDHEC-Risk Efficient Indices are an index series which uses a risk adjusted investment strategy to that of traditional market capitalization-weighted indices, to deliver investors with an optimal risk: return ratio.       

The FTSE EDHEC-Risk Efficient Index Series, a global offering, can be used by asset owners and investment consultants to capture equity market returns with improved risk/reward efficiency, according to the announcement. This efficiency is achieved by maximizing the Sharpe ratio, by weighting the constituents of the indices accordingly. According to the announcement, this enhanced methodology, combined with a constituent base deriving from the FTSE All World Index Series, “allows investors to utilize a new passive investment strategy, an area that is consistently growing amidst the global recovery”.      

According to a press release, these indices serve a different purpose to traditional market capitalization-weighted indices which are created to track the performance of the market, using an advanced methodology to achieve efficient risk to return.       

 Professor Noël Amenc, Director of EDHEC-Risk Institute, said: “Overall, traditional commercial capitalisation -weighted indices are not designed to be at the pinnacle of efficiency or provide well-diversified portfolios, as they principally track the market. EDHEC-Risk Institute has therefore undertaken major research in a methodology that minimises excessive concentration of risk and affords investors the ability to benefit from the maximum Sharpe ratio portfolio. This simple concept is primarily based on the concept of a positive and robust long-term relationship between the risk of a stock and its return and we are pleased to have partnered with FTSE Group, an authority in the field of indexing, to achieve this within an innovative index series.”      

Mark Makepeace, Chief Executive FTSE Group said in announcing the launch, “Increasingly, investors are looking to diversify their core passive funds across a range of benchmarks weighted by market cap and other weighting schemes.  The weighting methodology developed by the EDHEC-Risk Institute provides a robust and transparent approach to constructing a benchmark seeking to achieve an efficient risk return.”