Smith Breeden Associates will launch a portable alpha strategy that replicates the MSCI EAFE index via futures contracts and ports the alpha to a fixed-income portfolio to produce 100 to 200 basis points over the index. Smith Breeden researched the product five years ago but didn't move on it then because the futures markets for the countries in the EAFE index were very illiquid, Stanley Kon, director of research, said in an interview. But in 2002, when MSCI removed from the index those stocks that were not heavily traded, the futures contracts for each individual country became much more liquid. "We get a tracking error against the EAFE index that ranges within 50 basis points," he said. The strategy will also use derivatives to hedge against currency risk.
The alpha-generating portfolio will invest in undervalued investment-grade bonds and will hedge out interest rate risk, said Mr. Kon. He would not say when the strategy will be launched.
