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^*

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