First investment banks developed tools to act like hedge funds. Now their risk strategies are spreading to traditional money management.

With the help of its first big client, Goldman Sachs, Russell Investments and Axioma Inc teamed up to create the Russell-Axioma Momentum Index last year. As of this week, the Momentum Index now has four companion “factor” indices, one to manage leverage, another for liquidity, a third for beta, and a fourth for volatility.

Axioma, Inc., a leading provider of advanced tools for portfolio optimization and risk analysis, chipped in to manage risk using stocks in the familiar Russell 1000, 2000 and 3000 indices.

Intended for both investing and hedging, the factor indices are designed as a highly-tradable basket of stocks that closely tracks an element of risk and minimizes exposure to other risks. Turnover, transaction size and the number of companies will be strictly limited to keep down cost.

MSCI Barra already has a fleet of indexes that aim to deliver market returns plus exposure to one of five factors: momentum; volatility; leverage; value; and earnings yield. The company has licensed the indexes to BlackRock Inc.'s iShares in the U.S. and to Deutsche Bank's db x-trackers in the U.K.

Standard & Poor's offers an index that dynamically allocates between the S&P 500 index and a volatility hedge. State Street Global has custom systematic strategies for capturing individual factors for institutional clients.

Deutsche Bank AG and Morgan Stanley created indexes, then offered swap- and derivatives-based investments off the indexes.

The appetite for the products has come from pension funds and sovereign wealth funds that want to beef up performance of indices without paying for active management, which could cost twice as much.  But it’s still unclear whether the indexes will perform if used passively, with a “set it and forget it” rule.