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  Index Flow Modeling

What is the likely future performance of an index instrument? Given the performance of related indices up to date, what is the likely future demand for the various products that may be associated with with a new index fund? What is the mean estimate of the future market size of these products? These and many other similar questions can be addressed in a variety of ways, including the use of a Monte--Carlo simulation on three levels: (1) macroeconomic variables, (2) fund flows, (3) fund returns.

Fund growth is determined by two main factors: returns and net fund inflows. The former refers to the price appreciation and any dividend or capital gains distributions on the existing fund shares, while the latter refers to the demand for (and the commensurate issuance of) new shares of the fund. The returns of any diversified fund depend on macroeconomic factors that tend to move the entire asset markets. The net fund inflows, in turn, heavily depend on the realized risk--return tradeoff of the particular fund, as investors always seek to improve their risk--return tradeoff. For broad indices, the total risk measures are important, since these investments in themselves represent well diversified portfolios with low levels of the idiosyncratic risk. As a result, it is important to first simulate the macroeconomic variables that are generally believed to affect security and portfolio returns, followed by the simulation of the returns of the index fund in question. Finally, the simulation of the net inflows into the index fund as a function of previously simulated variables and their moments can be performed.

The methods briefly outlined above must be customized to the individual index fund considered, based on its characteristics. Herein lies the greatest portion of the necessary analysis. Depending on the client's specific needs, we implement such techniques so as to achieve the results.