# About MSR Indices

### What is an Index?

The definition of the word "index" has been rapidly expanding in recent years to include an ever increasing range of investment products. There are market based indices, the S&P500 for example, and there are indices of investment managers that pursue similar styles in similar market sectors. If you are looking for an index of hedge fund managers or commodity trading advisors you may turn to a firm like BarclayHedge or Hedge Fund Research for an index. Finally, the word "index" can be applied quite loosely to a group of specific investment managers found in a proprietor's fund of funds or to describe the historical simulation of a single investment strategy. These have all become accepted uses of the word "index."

MSR defines an index as the **statistical representation of the historical performance of a well-defined set of investment or trading rules.** For example, the S&P 500 tracks 500 stocks -- that is a "rule" -- not 200, not 600, but 500 stocks. There are also well defined rules on how the 500 stocks are chosen and when the basket of stocks changes. All of the types of indices described in the opening paragraph above conform with this "rules based" definition so long as the rules for calculating the index are well defined by the publisher. Therefore, we can define "index investing" as "rules based investing".

MSR Indices was created to combine the long established practice (one might say the original use of the word "index" in the investment community) of market based indexing with futures market pricing to define both traditional, long only investment strategies and the new and growing industry of liquid alternative investment strategies. We believe an index needs to be both investable and representative of a generally known investment style to provide useful information that is sufficiently powerful for sophisticated investment professionals.

An index only needs to represent a well defined set of investment rules to be called an "index", but "benchmarks" are a more exclusive sub-category of indices. What is classified as a "benchmark" can be a bit more subjective than the operational definition of an "index" outlined above. Investopedia defines a "benchmark" as a standard against which the performance of a security, mutual fund or investment manager can be measured. Therefore, it is really up to investors to choose their own benchmarks when evaluating the performance of their portfolios and individual managers.

MSR believes the marketplace has failed to provide sufficient benchmarks based on investment style. For example, an index that tracks the returns of investment managers who claim to employ predominately trend following strategies falls short of creating a sufficient benchmark for the style category of "trend following." Aside from the much discussed issues of survivorship bias and selection bias in manager based indices, you have the simpler problem of not really knowing what each manager is doing. MSR can now provide a true benchmark by employing a simple, widely used trend following model to a broad range of the futures marketplace that thoroughly covers the four major market sectors -- Equity Indices, Fixed Income, Currencies, and Commodities.

You can now find true market benchmarks for all of your liquid, developed economies' investments -- whether you are looking for a widely diversified index or an extremely focused and detailed index. If you need a benchmark to evaluate a trend-following natural gas trader, a reversal S&P500 Index trader, or an entire diversified portfolio with both long-only investments and alternative investments, MSR Indices has the index you are looking for.

### What is Risk-First Investing?

It might seem obvious that investors should always start their portfolio building processes with the question, "How much risk do I want to allocate to each investment, market sector, and investment style?" However, based upon the most widely used tools and metrics, it appears that many investors still take a "return-first" approach. This may be a "risk-adjusted return-first" approach to many, but MSR Indices is designed to provide professional investors the tools necessary for taking a truly "risk-first" approach.

All of our pre-built indices have 5%, 10%, 15%, and 20% target volatility versions. We measure volatility as the annualized standard deviation of returns. For example, a standard deviation of monthly returns is multiplied by the square root of 12 to calculate the annualized volatility while the standard deviation of daily returns is multiplied by the square root of 252 (estimated number of trading days in a year) to calculate the annualized volatility. While it is quite challenging to achieve the targeted volatility exactly, by applying the same algorithm to the trailing six month return of any non-adjusted index, we can control the amount of risk allocated to any one market, sector, or strategy in a consistent manner.

If you build your benchmarks based on target volatility, then comparing different assets, asset classes, and investment strategies (which can have dramatically different risk profiles) becomes much easier, and the information becomes much more powerful. You can then build a Model Portfolio where risk is allocated with maximum efficiency on every level of the portfolio -- from the individual constituents on up to market sectors, and finally to strategy styles. Furthermore, since the indices are investable you can actually build a portfolio this way as well. MSR Investments believes that "Risk-First Investing" is the proper method for building diverse portfolios, and we are committed to providing the tools required to make this process easy, efficient, transparent, and cost effective.

### Why Futures?

A futures price is a single number packed with information. Whether it is dividend payments in an equity index, interest payments in a bond index, or the net interest carry in a foreign exchange contract, all of the factors that determine value are included in one single price stream -- thus making any index based off of futures a total return index by definition. That is enough reason right there to build your indices around futures prices, but you have the additional benefit of futures providing an easily accessed alternative for actual investing.

Investing in futures is an efficient, transparent, and cost effective means of gaining market exposure to a wide variety of asset classes. Whether you are simply looking for the most cost effective way to invest in the S&P500 or looking to diversify into precious metals or foreign currencies, the futures markets provide professional investors with an attractive alternative to cash markets. If you consider all of the information a researcher can gather from our 1,000+ pre-built indices, you will come to appreciate just how useful and powerful futures price data can be.

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