So I see that synthetic enhanced indexing “involves gaining exposure to the benchmark via futures(or a swap)” …Ok I get that, makes sense, then “…while generating and alpha typically using fixed income”
What does that last part mean? how are they generating alpha usign fixed income?
Moreover, the notes say
excess return by altering the duration of the cash position. If the yield curve is upward sloping, the manager invests longer-term, if she thinks the higher yield is worth it. If, on the other hand, the yield curve is flat, the manager invests in short-duration, fixed-income securities because there would be no reward for investing on the long end.
once you have created a synthetic index using futures - you can at best match the returns on the index. (that is the risk free rate in this case).
Beyond that to get any alpha - your investments should be in fixed income.
and on the fixed income side - if you believe your yield curve is upward sloping - invest in long term fixed income, if the yield curve is downward sloping or flat - invest in the short term.
There is leverage in futures , since margin costs are a fraction of index prices. The excess cash after investing in futures is simply invested in a mix of treasuries and short duration corp bonds. This enables “tilting” the portfolio towards a desired alpha while retaining the systematic risk exposure of equities.
This approach offers more consistent alpha than stock enhanced indexing where the typical enhanced indexer typically underperforms the index most years i.e. offers negative alpha_._
alpha from from bonds/treasuries * net assets in fixed income + beta * margin * leverage of index futures.
The mix of treasuries and corp bonds is assumed relatively risk free ( at least as far as consistency ) while the stock side offers only systematic exposure , both in almost full measure due to low margin costs ( high leverage )