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S&P launches range of risk control indices

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Standard & Poor’s has announced the launch of a new range of risk control indices that will enable investors to target and control the level of risk in an underlying S&P index

Standard & Poor’s has announced the launch of a new range of risk control indices that will enable investors to target and control the level of risk in an underlying S&P index.
 
Standard & Poor’s says it is the first independent index provider to make volatility targeting indices widely available to investors.
 
Standard & Poor’s new risk control methodology will initially be applied to target specific volatility levels in four indices within S&P’s Emerging Market and Global Thematic Index Series: S&P BRIC 40 Index, S&P Latin America 40 Index, S&P South East Asia 40 Index, and S&P Global Infrastructure Index.
 
For each S&P risk control index, a specific volatility target is established based on the historical volatility of the underlying index, and volatility is monitored on an ongoing basis to ensure it remains constant.
 
If the risk level moves above the target, the cash level is increased in order to maintain the target volatility. If the risk level moves below the threshold, the index will employ leverage to maintain the target volatility. 
 
Steve Goldin, vice president of Standard & Poor’s Index Services, says: ‘Volatility targeting is a common feature in structured products, however integrating volatility control within index rules represents a new level of innovation for index providers. Traditional investments tend to provide investors with constant exposure to an underlying index, regardless of the prevailing financial markets, whereas the S&P risk control indices provide a dynamic exposure to an underlying index and target a constant level of risk.’
 
The S&P BRIC 40 Risk Control 18% Index, S&P Latin America 40 Risk Control 18% Index, S&P South East Asia 40 Risk Control 18% Index, and S&P Global Infrastructure Risk Control 12% Index will use the methodologies already established for each underlying index, with an overlying mathematical algorithm designed to control the level of risk.
 
The risk control levels of 18 per cent for the more historically volatile emerging market series and 12 per cent for the less volatile global thematic series were selected as providing a beneficial level of risk control for the current market environment.

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