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Hbs Bea Associates Case Study

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HBS BEA Associates Case Study

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Siyu Liu Garrett Stevenson Michael Cinelli Mohammed Shahruz

BEA Associates is an investment advisory firm founded as Basic Economic Appraisals in 1934. As of March 31, 1992, the firm manages $15.4 billion, representing over 164 institutional clients. BEA’s investment philosophy emphasizes return enhancement as well as risk control. BEA has been consistently earning returns in excess of the index averaging 80 basis points per annum by using enhanced equity index funds and enhanced cash strategies with various arbitrage-like techniques. BEA’s new enhanced index client is a Luxembourg subsidiary of a Japanese life insurance company. Jeffrey Geller and David DeRosa, derivatives portfolio manager at BEA Associates, are considering alternative ways of investing $100 million provided by this client. They want to find the most attractive combination of derivative and cash market positions to achieve the client’s objective of outperforming the S&P 500 stock index by 50 basis points in a low risk manner. The current alternatives are shown in Exhibit 1 in the Appendix. This case study will discuss the first three index synthetic alternatives. A general equity index fund is a type of fund that tracks the performance of a particular stock index with the objective of earning the average market return of the selected index stock portfolio. While an enhanced equity index fund invests based on benchmark indexes like the S&P 500, it offers the possibility of market matching or even market exceeding returns with reduced risks. BEA’s approach to an enhanced equity index fund is to use the synthetic alternative of investing in money market securities and buying S&P 500 futures. At a minimum cost to the investor, taking into account minimum transaction fees and required margin, a futures position will earn capital gains or losses on the futures

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