Custom Indexing

Enterprise-only service for creating and managing bespoke market indices with systematic rebalancing, factor-based construction, and institutional-grade index methodology.

Enterprise Service Only: Custom Indexing is available exclusively to institutional clients, asset managers, and enterprise partners.

Build and maintain sophisticated custom indices using Parallax's systematic index construction methodology. Create factor-based indices, thematic strategies, or bespoke benchmarks with professional-grade rebalancing and monitoring capabilities tailored for institutional applications.

Index Construction Philosophy

Systematic Index Design

Unlike traditional market-cap weighted indices, Parallax custom indices can be constructed using multiple weighting methodologies and systematic rules:

Factor-Based Indices

• Equal Factor Weighting:

Construct indices targeting specific factor exposures

• Multi-Factor Optimization:

Combine Value, Quality, Momentum, Defensive, and Tactical factors

• Dynamic Factor Allocation:

Adjust factor weights based on market conditions and valuations

• Factor Purity:

Ensure clean factor exposure without unintended tilts

Weighting Methodologies

• Equal Weight:

Each constituent weighted equally regardless of market cap

• Factor Score Weighting:

Weight by Parallax factor scores and overall rating

• Risk Parity:

Weight by inverse volatility for risk-balanced exposure

• Fundamental Weighting:

Weight by revenue, earnings, book value, or dividends

• Custom Rules:

Apply proprietary weighting schemes and constraints

Universe Definition

• Market Filters:

Large-cap, mid-cap, small-cap, or multi-cap universes

• Geographic Scope:

US-only, developed markets, emerging markets, or global

• Sector Constraints:

Include/exclude specific sectors or industries

• Liquidity Requirements:

Minimum trading volume and market cap thresholds

• ESG Integration:

Apply environmental, social, governance screening criteria

Index Types and Strategies

Pre-Configured Index Strategies

Pure Factor Indices:

  • Parallax Quality Index: Top quality-scoring stocks with fundamental strength
  • Parallax Value Index: Undervalued securities with strong balance sheets
  • Parallax Momentum Index: Stocks with positive price and earnings trends
  • Parallax Defensive Index: Lower-volatility stocks with stable earnings
  • Parallax Tactical Index: Dynamic allocation based on market conditions

Multi-Factor Combinations:

  • Quality-Growth Index: Quality + Momentum factors for growth investing
  • Defensive Value Index: Value + Defensive factors for conservative approach
  • All-Weather Index: Balanced exposure across all five factors
  • Dynamic Factor Index: Tactical allocation between factors based on cycles

Index Construction Process

Systematic Methodology

Phase 1: Universe Definition

  • Define eligible securities based on market cap, liquidity, and sector criteria
  • Apply quality screens to ensure investability and avoid distressed situations
  • Implement ESG or other values-based screens if required
  • Establish minimum and maximum position size constraints

Phase 2: Factor Analysis and Scoring

  • Calculate Parallax scores for all eligible securities
  • Analyze factor exposures and correlations within the universe
  • Apply factor filters based on index objectives (e.g., Quality > 7 for Quality Index)
  • Validate factor purity and avoid unintended factor tilts

Phase 3: Weighting and Optimization

  • Apply chosen weighting methodology (equal weight, factor score, risk parity, etc.)
  • Optimize for desired factor exposures while managing turnover
  • Apply position size limits and diversification constraints
  • Consider transaction costs and market impact in weighting decisions

Phase 4: Validation and Backtesting

  • Backtest index performance over multiple market cycles
  • Analyze factor attribution and risk characteristics
  • Validate rebalancing frequency and turnover implications
  • Stress test under various market scenarios

Rebalancing and Maintenance

Systematic Rebalancing Framework

Rebalancing Frequency

Monthly Rebalancing: For dynamic factor strategies and momentum-based indices

Quarterly Rebalancing: Standard frequency balancing turnover with factor capture

Semi-Annual Rebalancing: For longer-term factor strategies and lower turnover

Annual Rebalancing: Conservative approach for buy-and-hold strategies

Event-Driven: Rebalance triggered by factor score changes or market events

Rebalancing Rules

Threshold Rebalancing: Only rebalance when weights drift beyond specified thresholds

Factor Score Updates: Incorporate new Parallax scores as they become available

Constituent Changes: Add/remove securities based on continued eligibility

Corporate Actions: Handle dividends, splits, mergers, and other corporate events

Liquidity Management: Ensure adequate liquidity for rebalancing transactions

Transaction Cost Management

Market Impact Analysis: Estimate and minimize market impact of rebalancing trades

Timing Optimization: Execute rebalancing during optimal market conditions

Cross-Trading: Net buy and sell orders to reduce transaction costs

Gradual Implementation: Spread large rebalancing trades over multiple days

Cost Monitoring: Track and report all transaction costs and market impact

Performance Monitoring and Analytics

Comprehensive Index Analytics

Performance Metrics:

  • Total return, risk-adjusted returns (Sharpe ratio, information ratio)
  • Factor attribution analysis showing contribution of each factor
  • Tracking error versus relevant benchmarks
  • Maximum drawdown and volatility analysis during different market regimes

Factor Analysis:

  • Factor loadings and exposure drift over time
  • Factor timing effectiveness and attribution
  • Correlation analysis with traditional market factors
  • Factor purity metrics and unintended factor exposures

Implementation Quality:

  • Turnover analysis and transaction cost impact
  • Rebalancing effectiveness and timing analysis
  • Liquidity analysis and market impact measurement
  • Capacity analysis and scalability assessment

Client and Institutional Applications

Use Cases by User Type

Pension Funds:

  • Custom liability-driven indices matching pension obligations
  • Factor-based approaches for surplus optimization
  • ESG-compliant indices meeting fiduciary requirements
  • Risk parity strategies for liability matching

Endowments and Foundations:

  • Long-term growth indices with spending policy integration
  • Values-based indices reflecting institutional mission
  • Multi-generational investment horizon optimization
  • Inflation-protected strategies for real return preservation

Insurance Companies:

  • Asset-liability matching for insurance portfolios
  • Risk-based capital optimization indices
  • Credit risk and duration matching strategies
  • Surplus optimization and capital efficiency improvement

Technology and Implementation

Platform Integration

Index Construction Tools:

  • Intuitive interface for defining index rules and constraints
  • Real-time factor analysis and optimization capabilities
  • Backtesting tools with comprehensive performance analytics
  • Scenario analysis and stress testing functionality

Ongoing Management:

  • Automated rebalancing with customizable rules and thresholds
  • Real-time monitoring of factor exposures and performance
  • Alert system for significant factor drift or performance deviation
  • Comprehensive reporting and client communication tools

Data and Analytics:

  • Integration with comprehensive factor and fundamental databases
  • Real-time market data for accurate index calculation
  • Historical data for backtesting and performance analysis
  • Alternative data integration for enhanced factor signals

Ready to build your first custom index? Explore the Custom Indexing Platform to start constructing systematic strategies, or learn more about the Investment Methodology that powers our index construction approach.