Deutsche Bank's new alpha notes attractive in bear market, advisor says; Credit Suisse launches index

By Kenneth Lim

Boston, May 19 - Deutsche Bank AG's new leveraged upside securities linked to its proprietary equity indices could offer investors an easy way to outperform a bear market, an investment advisor said.

Meanwhile, Credit Suisse announced a new long/short equity replication index that aims to imitate the Credit Suisse/Tremont Long/Short Equity Hedge Fund Index.

Deutsche Bank launches alpha notes

Deutsche Bank plans to price zero-coupon leveraged upside securities due Nov. 23, 2009 linked to the Deutsche Bank X-Alpha USD Excess Return Index.

The underlying index tracks the relative performance of eight proprietary Deutsche Bank regional equity indexes against four regional well-known equity benchmarks - the Dow Jones Euro Stoxx 50, S&P 500, Topix 100 and FTSE 100. Each of the Deutsche indexes is paired against one of those third-party indexes, and the weighting of each pairing in the X-Alpha index is adjusted according to rules on regional weighting and target volatility.

At maturity, the notes will pay par of $1,000 plus 120% to 130% of the index return if the index ends higher than its initial level. The participation rate will be determined at pricing, which will be around May 20.

If the index finishes below its initial level, investors will lose 1% for every 1% decline in the index.

Notes require confidence in Deutsche

The notes are a bet on the design of Deutsche Bank's equity indexes, the investment advisor said.

"This is basically an outperformance product. Your returns are based on how well Deutsche Bank's indexes can outperform the general market," the advisor said. "So you have to look at the rules that govern those indexes and see whether they make sense."

The components of the index could help to reduce the volatility of the underlying, the advisor said.

"It's really an across-the-board kind of equity index," the advisor said. "The way it's split over the U.S., Europe and Japanese indexes could make it less volatile, because your exposure to each market is more spread out. The fact that it's an outperformance note also suggests that the volatility could be lower."

Leveraged outperformance a draw

Investors looking to outperform a down market could be interested in the product, the advisor said.

"In today's markets, everyone's looking for a way to do better," the advisor said. "Deutsche's expertise in these indexes is pretty solid. Historically it looks like they've done well also. If you're an investor and you think these indexes are going to outperform the market, then these really make sense. Not only are you outperforming the rest of the market, you're getting 1.2 to 1.3 times that outperformance."

"If the index does well, it's a pretty easy way to get in on some strategies that have historically done better than the market," the advisor said.

But the advisor said investors could risk underperforming the market even if the index does well.

"One of the issues I'm having is understanding how the index quantifies that outperformance," the advisor said. "If the general market goes up by 10% and the proprietary indexes go up by 12%, do you get 1.5 times of that 2%? Then you could possibly be underperforming the general market. But if the general market goes down and the proprietary indexes don't go down by as much then you'll definitely do better. The devil really is in the details."

Credit Suisse launches index

Credit Suisse on Monday launched a Long/Short Equity Replication Index that aims to replicate the risk/return characteristics of the Credit Suisse/Tremont Long/Short Equity Hedge Fund Index.

The bank said the new index is the first in a planned suite of Alternative Index Replication products that will be designed to imitate the performance of major hedge fund strategies.

"Long/short equity is typically the largest allocation and dominant return source in hedge fund portfolios, and investors today are growing increasingly concerned about the correlation of their hedge fund investments to the broad equity markets," Credit Suisse beta strategies head Oliver Schupp said in a statement. "This index allows them to gain systematic exposure and enhanced liquidity through a direct investment, or to tactically adjust their portfolios through a short position."

Walter Rotondo, Credit Suisse head of fund linked products also stated, "The Long/Short Equity Replication Index allows our clients to participate in the performance of this rapidly growing market segment."

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