BNP Paribas has partnered with alternative-focused mutual fund company Catalyst Funds, in the US, to create the BNP Paribas Catalyst Systematic Alpha Index (BNPP Casa Index), a risk premia strategy that allocates between seven different strategies developed by BNP Paribas' Quantitative Investment Strategies (QIS) group, each specifically designed to harvest non-traditional sources of returns.

SRP spoke to David Odenath (pictured), director, equity derivatives & quantitative strategies at BNP Paribas, about the aim of the new strategy and why hedge-fund like and risk-premia strategies will drive activity in 2018.

According to Odenath, the BNP Quantitative Investment Strategies (QIS) group and the investment team at Catalyst looked at some of the "most popular and persistent trades" among macro hedge fund managers with the aim of developing a systematic alternative risk premia strategy that could offer the same type of diversifying risk managed returns by investing long/short in the main asset classes including equities, fixed-income, commodities and currencies.

"We see demand for this kind of strategy in the market and the index can be deployed in different product wrappers," said Odenath. "The introduction of the index in a fund format allows retail investors in the US market to access an institutional-type of strategy."

Structured products have proved in the past that they are good vehicles to get exposure to difficult-to-access strategies or asset classes, according to Odenath. "The index has not been structured with a particular wrapper or type of product in mind as it has been designed to maximize returns," said Odenath. "We see the opportunity to bring some of these ideas and alternative risk-premia strategies to the adviser, broker dealers, and retail markets and could deliver them via capital protected products and other structures."

According to Odenath, when developing alternative risk premia strategies, "we are working with the fundamental building blocks of hedge fund strategies".

"This gives us the flexibility to increase/decrease the exposure to particular asset classes, and add risk management features which could customize an index to be used in structured products," said Odenath, adding that this kind of index can be used in different ways in order to diversify an investment portfolio. "In this case, because the underlying strategy has low correlation with the broader market it can be used as a complement for investors with higher allocations to traditional assets such as equities or fixed income."

This kind of index has traditionally been only available to institutional investors, hedge fund and swap dealers, according to Odenath. "Institutional investors such as California State Teachers' Retirement System (CalSTRS) and the State of Oregon have announced that they will be making major allocations to alternative risk premia in 2018 and the new index, through the Catalyst Fund, is making this kind of strategy accessible to advisers, broker dealers and retail investors," said Odenath. "In the past there was always a lag in terms of retail investors being able to access institutional-type of strategies, whereas this time we are running in parallel."

According to Odenath, fixed income strategies are also an area of focus for BNP Paribas in the US at the moment as many of its clients prepare for a regime change and an end to the bond market rally.

"The need for yield and distribution has not gone away but the ability to achieve this has become more difficult and has forced investors to go further out the yield curve and go lower on the credit scale to get the same returns," said Odenath, pointing that the bank is working on developing a number of strategies around fixed income to respond to demand from fixed income investors seeking alternative sources of yield and strategies to diversify the illiquid and duration sensitive parts of their portfolios.

"Multi-strategy fixed income products, and products incorporating a fixed income component are in demand and we have the ability to manufacture this kind of strategy and deliver it in different ways," said Odenath. "Our aim is to provide strategies that embody the core objectives we want to deliver. Once the strategy is out there we are usually approached by clients and investors that require a specific tweak or focus so many of our core flagship indices are customized to be used in structured notes, indexed annuities and other structured products."

According to Odenath, the bank will continue to capitalize on its approach to serve clients. "Our philosophy is to be reactive to what clients are demanding but also be proactive and provide our own ideas to the market," said Odenath. "One of our main focuses for 2018 will be fixed income because we feel there is a lack of strategies on this asset class, and we see clients requesting alternative exposure to fixed income assets."

Odenath also noted that investment patterns are changing and that the bank has seen increasing demand for ESG strategies "although at a slower pace than in other markets".

"We see traditional asset managers enquiring about ESG strategies and we are committed to being a leader in the ESG space and have the capabilities to meet that demand and capitalize on new opportunities," said Odenath.

The French bank launched and licensed the BNP Paribas Momentum Multi Asset 5 Index, in October 2017, to Legacy Marketing Group for a new fixed indexed annuity (FIA). The index is a risk control strategy providing exposure to a diverse range of asset classes ranging from developed and emerging equity/bond markets, to energy, gold and US real estate.

Catalyst Funds entered the US structured products market in Q3 2017 after acquiring the Exceed Defined Shield Index Fund from New York-based boutique asset management firm Exceed Investments, the firm pioneering "defined outcome" mutual funds that mimic traditional structured notes.

BNP Paribas has deployed a number of underlying indices in the domestic structured products market including the BNP Paribas Millenium Long/Short Commodities index, BNP Paribas Millenium Multi-Asset Dynamic Index, BNP Paribas Oscillator Commodities Target Volatility 8 USD index, and BNP Paribas Spectrum Long/Short Style index.

Most recently, the French bank licensed the newly developed BNP Paribas Momentum Multi Asset 5 Index to Legacy Marketing Group to be marketed via a single premium deferred index annuities developed with Ameritas Life Insurance Corp.

Catalyst Funds launched last week the Catalyst Systematic Alpha Fund (ATRAX), a new fund linked to the BNPP Casa Index which allocates between seven different strategies developed by BNP Paribas' Quantitative Investment Strategies (QIS) group, each specifically designed to harvest non-traditional sources of returns. Using a rules-based, risk-budget model, the BNPP Casa Index systematically allocates across each of these strategies, as frequently as daily, designed to adapt to various market conditions. Although the BNPP Casa Index synthetically invests across equities, fixed-income, commodities and currencies, it is designed to offer a low correlation to these markets.

The ATRAX fund invests in securities that provide exposure to the BNPP Casa Index, mainly non-exchange-traded total return swap contracts. The Fund also employs active management of a fixed income portfolio. The Fund's strategy, like the BNPP Casa Index, seeks to achieve long-term capital appreciation with low correlation via exposure to systematic positions that generate uncorrelated alpha through a multi-risk premia strategy.

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