Napoleon: the indexing needs of structured products manufacturers have changed

Ifrah has been in the financial services industry for over 20 years, mostly at BNP Paribas where he covered credit structuring and then capital-protected structured products with an equity futures and options based performance engine within the asset management side of the bank.

Although he delivered “slightly negative to slightly positive returns” in 2008 and participated in the 2009 equities rally and raised more than €1.5 billion in structured products in 2010, “during my last role at BNP Paribas AM (2005-2013) it became difficult to achieve good returns with discretionary trading,” says Ifrah, adding that at the time, the focus on quantitative strategies “was limited and there were no opportunities then to apply them within the bank”.

“That’s why I decided to leave and develop my own quantitative approach as a tool to make trading decisions.”

After a few years developing these tools, Ifrah joined efforts with two former colleagues to launch Napoleon Group, which houses three regulated entities: Napoleon Capital which creates and offers algorithmic strategies and advises on quantitative strategies for traditional and structured funds managed by BNP Paribas Asset Management; and Napoleon X Asset Management – the first European regulated asset manager to invest in crypto currencies.

In addition, the group’s Napoleon Index is an index administrator and calculation agent for third party indices using blockchain as audit track.

“This business comprises all our ideas and IP and the goal is to make it a launch pad and marketing platform for what Napoleon Capital and Napoleon Asset Management offer,” says Ifrah. “From an operational point of view, we use the blockchain as a trusted party where we record all transactions and positions that help us to create an audit track with paper trail.”

In the index operations, especially around corporate actions adjustments, this kind of tool has become pivotal.

“This kind of audit track has changed the way we look at corporate actions and has given us more granularity to see how the treatment of these corporate actions changes over time and adds transparency to any changes you introduce to your index value. Index data in general cannot be overwritten,” says Ifrah. “We could operate without a public blockchain set up, but it is a significant add-on to our offering and we’re in talks with a number of clients including tier one houses that are interested in this part of the business.”

Custom offering

Servicing the indexing needs of structured products manufacturers is a good example of how it makes sense to outsource some functions as opposed to developing them internally, according to Ifrah.

“Most issuers of structured products have an internal index business alongside their manufacturing capabilities, but for regulatory, internal compliance and commercial reasons they are required to provide independent calculation on their indices to address any potential conflict of interest and that has opened up opportunities for firms like ours,” he says. “Our edge is not so much with the ability to calculate indices, but on our financial expertise.”

Automation and industrialised processes are at the centre of Napoleon’s offering which “can be very competitive compared to more established index providers because of our IT platform and experienced index analysts and IT developers”.

“We operate in micro-services and multi-instances in order to bring flexibility, high availability and scalability to our clients,” says Ifrah. “We also have more flexibility than a big index provider, so we can be more responsive to a client’s request compared to the main index providers.”

Multi-instance means that the architecture allows a program to run on its own instance of the application, with its own distinct database. It can also run on a different operating system (OS), and a different hardware platform.

Blockchain

“The index space is growing in complexity and because of our quantitative approach we are quite tech oriented and bring to the table a use case for public blockchain,” says Ifrah. “Big players are looking at what it is available and what can be achieved. Product manufacturers are looking for a single solution that can be applied internally to streamline processes and become more efficient.”

Napoleon is seeking also to capitalise on its blockchain set up which makes transacting cheaper and gives users the ability to provide significant amounts of information and control who can access that information. 

“We have already had several conversations with potential clients and one of them, who initially did not show any interest on this side of our offering, called us recently to ask about our blockchain set up and now wants to test it,” says Ifrah, noting that issuers are also seeking to diversify the pool underlying their products. “Some issuers feel they are a bit overweight on some index providers and want to add new indices.”

Ifrah believes Napoleon can also capitalise on the need for diversification as “there are not many players out there”.

“There is room for new index providers in the market and we feel there is increasing demand for new providers,” says Ifrah. “From a technology perspective you don’t need to invest in very expensive software or servers, as we operate via the cloud, which is a pay-as- you-go facility.”

As the group begun developing its trading algos, the goal was to show the market what Napoleon can do, so instead of pushing its backtesting capabilities, the company saw an opportunity to develope indices “that would build trust with our clients” and could be deployed via structured products.

Napoleon Index already has between 30-40 strategies developed internally and can also deliver investment products via third party providers. Napoleon Capital and Napoleon AM have complementary index capabilities, but are also in talks with tier one issuers of structured products to reach a wider audience.