ANALYSIS
Analysis: rotator strategies We look at the pros and cons of underlyings allocating dynamically across different asset classes and sectors depending on market conditions. by Suzi Hampson – FVC
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ainstream benchmark indices tend to be made up of underlyings within a single asset class such as equities, bonds, FX or commodities. Within equities they can focus on regions, countries or individual sectors. Since most structured products are linked to indices for ease of calculation and to be easily recognised, it follows that they will also usually be tied to one asset class. However, most active fund managers with wide mandate would want to allocate dynamically across different asset classes depending on market conditions. “Rotator” strategies are designed to offer an alternative to active investment by allowing for changing in exposure over a number of asset classes by using a rules-based approach. This approach makes it viable for an index construction.
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Products linked to a complex underlying are often simple in payoff profile A Rotator strategy is one that uses market indicators to determine how the exposure should be split across its component instruments or sub-strategies. The proportion invested in each component will then change (rotate) depending on how the indicators move over time. Sector rotation strategies have a methodology that enables them to adjust their exposure to different sectors dependent on the chosen indicator. They aim to use information about the current phase of the outlook of the chosen sectors and invest accordingly to capture growth in each stage of the economic cycle. One example is the UniCredit European
