An Introduction to Factor-Based Strategies Through Futures

• Dr. Jan-Carl Plagge, Head of Applied Research
  

The increasing and more efficient capture of risk sources in the market has allowed investors to exploit these factors to obtain additional returns. Factor investing has seen a veritable surge in interest in recent years, and the possibilities of extracting, adapting and combining factor-based returns keep growing.

STOXX developed the iSTOXX Europe Factor indices in collaboration with Alpha Centauri, covering the following six strategies: carry, low risk, momentum, size, value and quality. At PULSE ONLINE, we covered the scope of these more extensively in an article last year.

The introduction in April of futures on the iSTOXX Europe Factor indices on Eurex allows investors to pursue factor-based strategies both on a long and short book. They also provide an efficient vehicle to access the pure targeted factor premium independent of any market risk or direction, as investors can hold a factor index future and short at the same time futures on the STOXX® Europe 600 Index, all on one same venue.

The futures have got off to a good start. In their first two months, over 25,000 iSTOXX Europe Factor Futures contracts exchanged hands.

In occasion of the launch of the futures, Dr. Jan-Carl Plagge, head of applied research at STOXX, sat down with our colleagues from Eurex, Europe’s largest derivatives exchange to review the principles and possibilities of factor investing.

As factor-based strategies grow and evolve in portfolios, we’ll report on new developments on this trend in upcoming articles.

 

Featured indices

iSTOXX® Europe Single Factor indices