What is Risk Control Indexes?

Traditionally risk control indexes have been designed to target a specific volatility level of an underlying equity index by rebalancing among an equity index and cash on a frequent basis (e.g. daily). Within the context of structured products, some managers have used such risk control indexes as a reference of performance with respect to payouts to investors.

 

What is Maximum Exposure Risk Control Indexes?

The launch of MSCI’s Maximum Exposure Risk Control Indexes represents an alternative way to incorporate risk control by maximizing the weighted risk allocation of an equity and fixed income index. This represents an extension of our existing Risk Control methodology and emerges from an in-depth comparative review and analysis by our research team.

The MSCI Maximum Exposure Risk Control Indexes aim to replicate the performance of an investment strategy that maximizes the risk-weighted exposure to the underlying indexes and targets a specific level of risk by varying the weights of three components, determined daily based on an optimization seeking approach:

  1. Equity index (e.g., market-cap, thematic, ESG, Climate or factor index);
  2. Fixed income index (e.g., U.S. treasury index); and
  3. Cash.

The idea to maximize the exposure to both equity and fixed income asset is the key one in this approach: risk-adjusted returns of the two may be similar and there is no reason to treat them differently (see paper below for exact optimization formula).

Maximum Exposure Risk Control had on an average1

  1. Improved risk-adjusted returns over the sample period
  2. Similar or higher exposure to both underlying indexes
  3. Realized volatility close to the target

MSCI ACWI risk control 10% performance and their realized volatility*

MSCI ACWI risk control 10% performance and their realized volatility
MSCI ACWI risk control 10% performance and their realized volatility

* Extended risk control mechanism allocates to the equity index based on its volatility, up to 100% leverage. Remaining weight (up to 100%) is allocated to treasuries. Second layer with cash adjustment is applied to reach closer to the risk control level with a leverage cap of 150%.


Index series

 

Learn more about these new indexes

We have launched five new MSCI Maximum Exposure Risk Control Indexes, that offers investors an alternative optimized approach to risk control that aims to maximize weighted risk allocation of an equity and fixed income index.

Methodology      Factsheet       Factsheet(ESG Leaders)

 

The five MSCI Maximum Exposure Risk Control Indexes available are:
  • MSCI World 10% Maximum Exposure Risk Control Index
  • MSCI World ESG Leaders 10% Maximum Exposure Risk Control Index
  • MSCI Emerging Markets 5% Maximum Exposure Risk Control Index
  • MSCI EAFE 5% Maximum Exposure Risk Control Index
  • MSCI USA ESG Leaders 5% Maximum Exposure Risk Control Index

Featured Content

 

Featured Content


Risk Control with Maximum Exposure

Risk Control with Maximum Exposure

Classic risk-control uses cash and/or U.S. Treasurys with a growth asset, typically referenced to an equity index, which has stabilized volatility, but not always allowed strategies to reach their full potential. We present new approaches for doing so.

Risk Control Indexes Related Content

Risk Control Indexes footnotes

 

1 Sample period: Jan 1, 2002 – Oct 31,2021. VT=10% using MSCI ACWI and leverage constrained to 150%.