BNP Paribas Launches S&P Hedge Index Derivatives

by Carla Johnson, Investors Offshore, London

19 December 2002

After Standard & Poor’s, the independent financial research, ratings and indices leader, launched its S&P Hedge Fund Index a month ago, BNP Paribas has announced it is the first to have been granted a licence by S&P to deliver derivative products linked to the Index. S&P said when launching the Index that marketing of the Index as an investment base had been licensed to PlusFunds for the development of investment products that replicate the index.

BNP Paribas says it will offer investors around the world innovative exposure to the newly launched S&P Hedge Fund Index. BNP Paribas intends to provide a variety of derivative products linked to the Index that could include principal protected notes, swaps and options that will be available to investors worldwide. BNP Paribas expects products and liquidity to be available by early 2003.

S & P describes its Hedge Fund Index as offering investors an investable benchmark that is broadly representative of the range of major strategies that hedge funds employ. The index has 40 constituents divided into three sub-indices: S&P Arbitrage Index, S&P Event-Driven Index, and S&P Directional/Tactical Index, which in turn represent a total of nine specific strategies. These strategies include: Equity Market Neutral, Fixed Income Arbitrage, Convertible Arbitrage, Merger Arbitrage, Distressed, Special Situations, Long/Short Equity, Managed Futures and Macro. The strategies are equal weighted to ensure well-rounded representation of hedge fund investment approaches and to avoid over-representation of currently popular strategies.

The S&P Arbitrage Index (the first sub-index of the S&P Hedge Fund Index) is composed of funds attempting to exploit pricing differences among securities with similar risk characteristics, generally by taking long positions in the under-priced security and short positions in the relatively over-priced security. Typically, these strategies employ leverage to accentuate relatively small differences in price movements. These funds tend to have low systematic market exposure. The S&P Arbitrage Index has three component strategies: Equity Market Neutral, Fixed Income Arbitrage (including Mortgage Arbitrage), and Convertible Arbitrage.

The S&P Event-Driven Index (the second sub-index of the S&P Hedge Fund Index) is composed of funds attempting to exploit mispricings of securities as it pertains to specific events, which are typically security specific (as opposed to macro-economic trends). Generally, funds in this category are looking for significant changes in outlook for firms that are in financial distress, are merger candidates, or have mispriced securities. The S&P Event-Driven Index has three component strategies: Merger Arbitrage, Distressed, and Special Situations.

The S&P Directional/Tactical Index (the third sub-index of the S&P Hedge Fund Index) is composed of funds attempting to exploit general market trends or specific tactical situations. These funds are not market neutral, but rather are looking for anomalous prices using systematic or fundamental processes. They tend to have higher systematic market exposure. This S&P Directional/Tactical Index has three component strategies: Long/Short Equity, Managed Futures, and Macro.

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