TaBLE of contents:

A.  Backtesting and Index Review

B.  Index Review and Rebalancing

C.  Factsheet and Reporting


A.  Backtesting and Index Review


1.             What is backtesting?

Backtesting is a process that evaluates the effectiveness of a trading strategy by running it against historical data.  For an index, this involves performing reconstitution and rebalancing at defined periodic intervals as per the methodology and calculating the daily index values for the entire backtesting period. With our tool this process can be performed in just a few minutes.


2.            What is Cap level? 

Cap level is the predetermined threshold value for the maximum weight that any single constituent may have in the Index on the rebalancing date.  It prevents any single constituent from exerting disproportionate influence on the index value.


3.            What is the constituent?

A constituent is a stock or company that is part of a larger index.


4.            How is Iterative Capping performed?

If any constituent weighs above the ‘Cap level’ of an Index, a less than 100% adjustment factor (capping) will be applied to reduce the weight to the cap level. This will redistribute the excess weight among other uncapped constituents in proportion to their respective weights and might potentially push the weight of other constituents above cap level. Capping of constituents with weight above cap level will be repeated until weights of all the constituents are confined below the cap level.


5.            What is weighting methodology?

Weighting methodology defines the measure of underlying constituents used in computation of Index Value. Most commonly used measures are Price weighted, Market Value weighted, Free-float Market Value weighted and Equally weighted. In some cases, alternative weighting methods like volatility, dividend yield etc., are also used.


6.            What is Free Float Adjusted Factor (FAF)?

Free Float Adjusted Factor (FAF) is the percentage of shares for a given equity that are available for trading and not part of long-term strategic holdings.


7.            How is FAF computed?

The number of shares held by insiders, promoters, governments, strategic holders and non-profit organizations are deducted from the total number of shares issued by the company to calculate percentage of shares readily available for trading, which is the Free-float adjusted factor (FAF).


8.            What is a buffer zone?

A buffer zone is used to reduce the turnover of an index by allowing for some flexibility in the application of ranking criteria to select the final constituents in an Index. An existing constituent will not be removed from the Index unless it ranks much worse than the acceptable ranking order and a new constituent will not be included unless in ranks much better than the acceptable rank. This range of ranking for new constituents to be included and existing constituent to be excluded is called as buffer zone. 

As an example, an Index might have 40 constituents, but for a new company to be inserted into the index, it may be required to rank 32 or better, and for an existing company to be kicked out of the index, it would have to rank worse than 48. 


9.            What is a reserve list?

As part of the index review process for an index, the system generates a reserve list to facilitate the constituent replacement of any outgoing stock between regular reviews. This kind of untimely replacement may happen in cases where there’s a constituent removal because of trading suspension or delisting. The system can create a reserve list depending on the underlying index methodology.


10.         What is eligibility criteria?

Eligibility criteria is a selection criterion you can customize for the stock to be classified as eligible or ineligible to be included in the Index. The system allows for a variety of measures such as listing history, total market value, dollar turnover, volatility, dividend yield, earnings per share, liquidity of a stock, etc., which can be used to define an eligibility criterion. Each measure can be calculated for a defined number of periods in the past from the review date and eligibility criteria can be set based on number of periods in which stock has passed the criteria.


11.         Can I import my own eligibility criteria?

               Although you cannot import your own criteria, custom measures can be built using the available data in the system.


12.         What does winsorize mean? 

Winsorize means to transform statistics by limiting extreme values in the data to reduce the effect of possibly false outliers.  To learn about this in greater detail, we suggest you also visit the Wikipedia page


13.         What is liquidity measure?

               Percentage of shares traded for a stock in a given period is liquidity. It can be defined as the mean/median/total shares traded in each period.


14.         What is the listing requirement?

               The listing requirement gives you the ability to set a certain minimum period which the company should be listed for to be included.


15.         What is the universe?

               The universe refers to the set of stocks to be considered for the constituent selection in your backtesting and for performing index reviews.


16.         What predefined universes are available?

Universe conditions based on Geography, Listing exchange, Share class, Industry or Sector, Country of domicile etc., are available in the system. Universe can also be based on existing benchmark indexes like S&P 500, FTSE 350, SSE Composite Index, Hang Seng Composite Index etc. In addition, a custom stock list can also be uploaded to be used as a starting universe for an Index.


17.         Can I define my own universe?

               Yes, you can easily define your own universe using the various condition options available.


18.         How many conditions can I choose and add for my universe?

A maximum of 20 conditions can be defined in one universe.  However you can add multiple universes and do a union/intersection of such universes when it comes to defining an index.


19.         What is an exclusion list?

An exclusion list can be maintained in the system to exclude securities for various reasons like high shareholder concentration, fraud and investigation, suspension from trading, etc.


20.         Can I upload my own exclusion list?

               Yes, you can upload a list of stocks as an exclusion list and use that in the Index.


21.         What is ranking requirement?

In most indexes, there is a limit on the number of constituents therefore there is a requirement to rank the potential candidates eligible to be selected as constituents in the Index. These include measure, order, composite ranking and tie breaking criterion.


22.         What is tie breaking criterion?

               In certain instances, if two stocks have a same rank, a tie breaking criterion may be applied.


23.         What is composite ranking in ranking requirements?

In some cases, multiple ranking criteria may be used and the average of all the ranking criteria may be applied for the final selection. This is composite ranking.


24.         What is order in ranking requirements?

               The order in which the ranking is to be done i.e., ascending or descending.


25.         How many eligibility criteria fields can you add?

               A maximum of 8 eligibility criteria can be defined for an Index.


26.         How many ranking criteria fields can you add?

               A maximum of 8 ranking criteria can be defined for an Index.


27.         How do I adjust the criteria formula?

               Multiple eligibility criteria can be grouped together by using the and/or options in the eligibility tab.


28.         How do I export backtesting results?

               Exporting your results is simple, just click “export results” and the results will be exported into an excel file.


29.         What is an Index Review?

Index Review is a process of reviewing the constituents of an index on a periodic basis. It includes identifying the universe for constituent selection based on the index methodology, validating the continuing eligibility of existing constituents, and making any additions or deletions to the constituents if necessary.


30.         How long does an index review take to run?

               This depends on the complexity of the Index, but as a ballpark, it takes around 2 minutes to run a review for a medium complexity Index.


31.         Can I add to the build formulas?

Yes, you can. Start by choosing backtesting on the top of your screen then click “build formulas” Choose a name for your formula, then choose a factor. Type in the formula you wish to use and click save. Need more help? Check out our video on selecting factors and building formulas here.


32.         How do I perform data validation?

Select a measure you want to validate from the pre-populated drop down then choose the period and validation rules to be applied. Underlying data from different data sources will be compared and the stocks which have failed the rules selected will be flagged for manual review. Validation results can also be exported to an excel file and upload back to the system after resolving the failed cases.


33.         Can I have separate inclusions and exclusions for existing and new constituents?

Yes, it often makes sense to be more lenient on existing constituents. You can make these changes in the “eligibility” tab under backtesting. Click here to view how it’s done.


B.  Index Review and Rebalancing


34.         What is Volatility?

Volatility is a metric of how rapidly the price changes for a security. It is calculated as standard deviation of price returns in a given period. The higher the volatility, higher the price change and hence higher the risk.


35.         What is Industry classification?

Industry Classification is the process of classifying a company as belonging to a certain industry according to its dominant line of business. Classification of companies by industry aids in assessing the performance of stocks in different business sectors and makes it possible to build industry-specific indexes.


36.         What is Free Float classification? 

               A Free Float Classification is a method by which the market capitalization of an index's underlying companies is calculated.


37.         How do I calculate FAF for specific securities?

The shares that a company lists on an exchange are owned by shareholders with different strategic interests. Some may want to hold them for a long time while others frequently engage in their trade. FAF for a security is the proportion of shares that are truly available for trade and not used for long-term strategic holdings. To see how this calculation is done view our how-to video here.


38.         Can I change the FAF global parameters?

               Yes, choose “FAF calculation” on the top menu then “FAF Global Parameters” now simply choose the parameter you wish to change.


39.         How do I manage ownership exceptions?

Go to the top of your screen and choose “FAF Calculation” and then choose “Maintain Ownership exceptions”. Here you’re able to make edits as needed by choosing the exception you wish to edit, add or delete.


40.         How do I define my own industry classification?

Every company can be classified into different categories like industry sub-groups, geography, customer base, business type, etc. Among the many advantages of classifying companies is the ability to group companies to create specialized indexes and as well as to diversify risk in a portfolio of companies. Users can define their own classification system including designing the tiers of each classification, the number of classifications, etc.


41.         What is Index Re-balancing?

Index rebalancing involves realigning the weightings of portfolio assets periodically to keep the original asset allocation by updating issued shares as of the cutoff date.


42.         How do I perform quarterly index rebalancing?

Start by clicking “index rebalancing “on the top of the screen and navigate to “perform quarterly rebalancing”. Choose the date for your inquiry then choose your index category and click “view changes”. For more information, check out our video “How do I perform quarterly rebalancing?”.


43.         What is Adhoc rebalancing?

When there is a corporate action or when the change in shareholding structure of a company is deemed significant (above a certain threshold), the index is updated with latest data and rebalanced. Since this occurs out of a predefined calendar (like end of the quarter), we call this process Adhoc rebalancing.


44.         How do I perform Adhoc rebalancing?

Start by clicking Index rebalancing on the top menu and choose “perform AdHoc Re-balancing”. Next choose your dates, threshold limits and tickers. You’ll see the eligible tickers pop up below, now calculate the FAF. After you’re done that you’ll see the tickers have a new FAF, click the “rebalance” button and you’re done. For more on how to perform Adhoc rebalancing view our video “how do I perform Adhoc rebalancing” here.


45.         What is AH Share Class Switch?

The process of selecting the share class trading at lower price within the same company in the index is called Share Class Switching. These kinds of Indexes provide the benchmark for investment strategy to generate profit by switching between the share classes depending on the relative prices.


46.         What is a share class?

               A share class refers to different types of shares within a company that have different rights based on how they are categorized.


47.         What is Free Float market valued weighted?

               This is a scheme which assigns the weights to the constituents proportional to their free-float market value.


48.         What is equally weighted?

Equal weight refers to the weighting scheme that gives the same weight to each stock in a portfolio.  So an equally weighted index made up of 50 companies will assign a 2% weight to each constituent.


49.         What is market cap value weighted?

               This is a scheme which assigns the weights to the constituents proportional to their total market value (freefloat + non-freefloat).


50.         What is alternative weighted?

               Alternative weighted refers to weighting schemes based on measures like dividend yield, volatility, beta versus a benchmark index etc.


51.         What is adjustment factor?

An adjustment factor is a multiplier applied to the weighting measure such that the final weight is equal to the target weight in case of alternative weighted indexes or to limit the weight below cap level for market value weighted of free-float market value weighted Indexes. In cases of equally weighted, adjustment factor ensures weights of all constituents are same on the date of rebalancing.


52.         What are constituent changes?

               New stocks added to the Index or existing stocks removed from the Index are examples of constituent changes.


53.         What does the concentration chart show in backtesting?

               The concentration chart in backtesting shows the sum of constituent weights by industry or geography.


54.         What is constituent weight?

               Ratio in which the Index value is influenced by price movements of given constituent.


55.         What is the measure score?

The final measure score is the value computed by evaluating the underlying factors and applying the formula specified by the measure, and performing any aggregations (if needed).


56.         How do I perform an industry classification analysis?

This is the process of classifying a group of companies into their industries based on their dominating line of business. The companies can be classified into an industry or even a geography. You can select the scope of the companies to classify as well as the review dates for when it is to be done. Once the process is triggered, the program will select the business segments of the companies from preloaded segment data and classify the companies based on which industry sub-group the segments are mapped to.


57.         How do I perform a company classification analysis?

This is the process of classifying an individual company into an industry based on its dominating line of business. The company can be classified into an industry or even a geography. You can add business segments and map those segments to different industries or geographies. Our system then analyzes the dominating subsector based on either revenue, sales or profits to classify the company.


58.         What is an IC review summary?

This is a process to view the outstanding as well as the most recent Industry Classification reviews, the list of users, the tasks assigned to them and their status, and some other user statistics. These tasks can be reassigned to different users for a review process.


C.  Factsheet and Reporting


59.         What is a fact sheet?

Factsheets provide information to give investors and customers a quick and easy means to understand the key facts regarding an index. In addition to basic information such as index features and ticker symbols, factsheets provide more detailed data such as performance statistics, historical performance, and index constituents.


60.         What are the fact sheet components?

               This refers to the various charts, graphs and statistics you can add to your factsheet, such as index performance, history etc.


61.         How many templates can I create?

               There is no limit to the number of templates you can create.


62.         Can other users in my company see my templates?

               All templates are password protected and can only be viewed with the authentication.


63.         How do I export and share my factsheet?

               Simply click the export button and a PDF of your factsheet will be created.


64.         How do I run a company ownership analysis?

To run a company ownership analysis, go to company ownership analysis page under FAF Calculation from the top panel, search for any company and select the period from drop-down to view the ownership analysis report.


65.         What is the company ownership analysis?

This analysis provides the details of the shareholding structure of a stock. It details the number of shares held by each owner and the category of ownership whether it is under insiders or institutions.  Additionally, it shows ownership type like strategic holdings, Sovereign Wealth Manager, mutual funds etc., which is used to determine the total number of free float shares available.


66.         What is the open-high-low-close report?

This report shows the Index value at market open, market close and intra-day high and low for each trading date between selected start date and end date range. This report can be generated for a one or more Indexes and data can be exported to excel.


67.         What is the index features report?

               This report shows Index specifications like launch date of the Index, base date, base value of the index and its weighting scheme.


68.         What is the MT, Turnover and records report?

This report shows Index parameters that can vary on a daily basis or on rebalancing dates. Total market value of underlying constituents covered by the Index, free-float market value, Index turnover, total market turnover, Price to Earnings ratio, Dividend Yield etc., are shown for each trading date between selected start date and end date range. This report can be generated for a one or more Indexes and data can be exported to excel.


69.         What is the sector distribution report?

This report shows the total weight of constituents in an Index belonging to each sector on any given trading date between the selected start date and end date range. This report can be generated for a one or more Indexes and data can be exported to excel.


70.         What is the index correlations report?

This report shows the statistical relationship between any two selected Indexes for a given period. Frequency of calculation in the selected date range can either be weekly or monthly. Correlation is calculated using the daily price changes of selected Indexes going back one year for each period.


71.         What is the index performance report?

This report shows Index return for several time periods from a given reference date. Returns are shown for one-day, one-week, one-month, three-months, six-months, one-year, three-year, five-year, Year-to-date, and for each calendar year for the past years from reference date.


72.         What is the top 10 ups & downs report?

This report shows the 10 trading dates ups and downs. The top 10 ups are the dates on which the Index closing price has increased the maximum compared to the previous trading date in a selected date range. The top 10 trading downs are the dates on which the Index closing price has decreased the maximum compared to previous trading date in a selected date range. The change with respect to previous day can either be calculated on point basis or percentage basis.


73.         What is the index volatility report?

This report shows annualized volatility for the past 10 years, one-month, three-months, six-months and one-year from the given reference date. It also shows the 52-week high and low from the reference date. This report can be generated for a one or more Indexes and data can be exported to excel.


74.         What is the historical changes report?

               This report shows the list of constituents added and deleted from the selected Index in a given date range.


75.         What is the index rebalancing report?

This report shows the turnover in an Index because of constituent additions or deletions by calculating the total buy and sell amounts for each trading date in the selected date range. This report can be generated for a one or more Indexes and data can be exported to excel.


76.         What is the index constituents report?

This report shows the list of underlying stocks constituting the given Index for each trading date in the selected date range. Constituent specific information like close price, issued shares, weight in the Index, Industry, sector etc., are also shown.


77.         What is the corporate actions report?

This report shows various corporate actions like additional issued shares, rights issues, bonus issues, stock splits or consolidations in a selected start date and end date range.


78.         What is the dividends report?

This report shows dividend payment details by the companies constituting the given Index and the ex-dates in a selected start date and end date range.


79.         Can reports be set up to automatically run weekly/monthly/quarterly?

Yes, reports can be setup to run on given time intervals as well as based on a specific condition. For example, generating full historical constituent changes report whenever a constituent changes happen going forward is possible.