The company also provides in the US an S&P 500 130:30 index, based on which State Street Global Advisors has launched an exchange traded fund, and an S&P 500 short index. The first of the arbitrage indices are: the S&P 500 Volatility Arbitrage Index; the S&P Currency Arbitrage Index; and the S&P Long-Only Merger Arbitrage Index. More arbitrage indices are expected later this year.

The volatility index models a strategy which takes advantage of the difference between implied volatility and realised volatility. The index receives implied variance and pays realised variance of the S&P 500. The volatility investment strategies are based on the tendency for implied volatility of an asset to be higher than realised volatility. The currency arbitrage index models a strategy based on the G10 currencies, taking a long position in currencies which have a higher interest rate than the US dollar and a short position in currencies with a lower interest rate than the US dollar.

The weight of each currency is directly proportional to its interest rate spread and inversely proportional to its volatility. The merger arbitrage index models a strategy which exploits various commonly observed price changes associated with mergers. The index is comprised of long positions in up to 40 large and liquid stocks that are active targets in pending merger deals. A target company is considered for inclusion if at least 25 per cent of the bid is to be paid in cash.

Deals are screened on the basis of size, liquidity, premium and exchange listing to ensure the underlying positions are tradable and that there is upside potential if the deals close. In November last year, S&P announced it would launch three USbased credit default swap indices in the first quarter of this year. While these are not customised indices their development is a big step forward for investors aiming to judge the performance of new and sophisticated strategies by their managers, and therefore make more informed decisions on what constitutes skill and how its should be remunerated.

The index management versus active management debate, which has raged for more than 20 years, continues. Even for investors who believe they can pick managers who can beat their benchmarks consistently, a better understanding of those benchmarks will improve their governance procedures and help keep managers honest with their fees.