Lehman Brothers plans in the coming months to launch an interest-rate swap index that fund managers will be able to benchmark their performance against. The firm is planning to offer total rate of return swaps on the index once it has gained popularity. This is the first index of its kind, according to Bruce Phelps, senior v.p. in fixed income research in New York. Lehman is planning the product because European investors are already using the swap market as a benchmark and the U.S. is slowly moving toward doing the same.
Farid Gargour, senior fund manager on the RAB European high-yield fund at RAB Capital in London, said it would be interested in entering a total-return swap in which it could pay the interest-rate swap curve and recieve a high-yield index. But he added that it would depend on the structure of the swap.
Previously funds were benchmarked to the government bond yield curve but a problem with this is different factors affect the yield curve, such as an election or a war, than affect the corporate curve, a market official added. And a corporate fund manager's performance could, on paper, change because of influences outside their expertise. Phelps added, "The appropriate benchmark is still up for grabs."
The firm will offer three types of index. One will consist of 32 indices showing the performance of swaps from three months to 30 years. The second will be a single index that gives an equally weighted measure of the 32 indices. The third type will allow investors to compare the swap market with other sector indices, such as the Lehman Brothers Mortgage Index or the U.S. Aggregate Index. An official at the firm said it plans to offer total rate of return swaps where investors can pay or receive one of the swap indices against one of Lehman Brothers' other indices.
