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Bea Associates Essay

4619 words - 19 pages

Harvard Business School

Rev. December 16, 1994

BEA Associates: Enhanced Equity Index Funds
On the afternoon of July 13, 1992, Messrs. Jeffrey Geller and David DeRosa, derivatives portfolio managers at BEA Associates, were considering alternative ways of investing the assets of a new $100 million enhanced index account. They wanted to find the most attractive combination of derivative and cash market positions to achieve the client's objective which was to outperform the S&P 500 stock index by 50 basis points in a low risk manner. The alternatives included the use of over-the-counter equity swaps, a relatively new financial instrument that had proliferated in recent years.
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The firm also aimed to offer clients a high degree of product customization. In pursuit of these aims, BEA made extensive use of derivative instruments such as options, futures, and swaps.

This case was written by Professor André F. Perold as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1992 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

Purchased by: LEI ZENG LEIZENG2012@GMAIL.COM on November 05, 2013


BEA Associates: Enhanced Equity Index Funds

In its more traditional equity and fixed-income portfolios, where outperformance was sought principally by investing in attractively valued stocks, bonds, and other physical securities, derivatives were used mainly as a low-cost way of controlling market risk and currency risk. In its derivativesbased portfolios, derivative instruments were used much more extensively both to manage desired portfolio risk exposures and, through various arbitrage-like strategies, to generate incremental returns. Derivatives-based products consisted primarily of enhanced equity index funds ($1.6 billion, described more fully below) and portfolio hedging ($3.2 billion). Portfolio hedging involved overlaying on top of an already existing portfolio a series of derivative hedge positions designed to tailor the portfolio's exposure to broad market risks such as currency risk, interest rate risk, or equity market risk. A typical hedge program would be aimed at limiting the portfolio's downside exposure while retaining much of the upside exposure to the risk in question. BEA's derivatives group was formed in 1982. Currently, the group consisted of three portfolio managers, two traders, and two portfolio assistants. The portfolio managers were Jeffrey Geller, Managing Director, head and founder of the group, David DeRosa, and Vincent Bailey; the traders were Mark Barres and Mario Montoya. Each member of the group had a particular area of specialization and a strong background in the area of derivatives.1 Investment decisions were made by each portfolio manager individually, but only after discussion with the traders and other portfolio managers. No "new" kinds of trades could be implemented without Jeffrey Geller's approval. The complexity and ongoing maintenance requirements of derivative strategies made such group consultation a critical part of quality and risk control.

Enhanced Equity Index Funds
David DeRosa explained the basis of BEA's approach to enhanced equity index...

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