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The Institutional Index as an Effective Hedging Tool
Jan 1, 1992
The American Stock Exchange in late 1986 unveiled a 75-stock capitalization weighted index. This institutional index, known as the "XII," consists of publicly traded companies held by institutional portfolios in the greatest dollar amount. The XII, as the epitome of institutional portfolios' holdings, can be expected to track both their characteristics and their performance much more closely than most, if not all, broader-based alternatives. At the very least, trading 75 XII stocks is certainly less costly than maintaining a basket comprised of all S&P 500 companies. In this article, we will examine the XII Index as both a proxy for and an alternative to the S&P 500 Index. We will first identify the major differences between the XII and the S&P 500. This analysis incorporates the results obtained using Barra's PERFormance ANalysis (PERFAN) software. We will then compare their effectiveness as a hedge in three separate case studies. These studies rely on Barra's U.S. Interactive Portfolio Risk Characterization (IPORCH) software to facilitate each hedge's construction. These hedges will be formed from the XII and the S&P 500 both individually and in combination with other indexes. Our studies use managed portfolios of various growth characteristics to examine the effectiveness of the XII relative to the S&P 500 under a variety of circumstances.