Janet Wilkinson 0:11
Hello, and welcome to our Partner of Choice podcast, where we combine insights from the RBC Capital Markets team across asset to deliver leading solutions for our clients. I’m your host, Janet Wilkinson, Managing Director & Head of Global Markets Flow Sales EMEA. Today, we’re focusing on the role of Defensive Overlay Strategies, and Quantitative Investment (QI) approaches. As market conditions shift, with correlations changing and volatility re-emerging in new forms, many investors are revisiting how they manage risk, allocate capital, and stay on track with long-term objectives. Overlay strategies and QIS are increasingly being used, not just as portfolio add-ons, but as integrated tools that can help provide precision, enhanced responsiveness, and re-enforced resilience across asset classes. So today, to walk us through how these strategies are evolving, and how clients are using them, with me are three colleagues leading this work across our platform. Introducing Solenn Le Floch, Managing Director, Global Market Solutions, and Akilesh Eswaran, Global Head of QIS and EMEA Head of Equity Trading. And finally, Samkit Tated, Director of QIS Structuring.
Solenn Le Floch 01:49
Thank you, Janet, it’s great to be here.
Akilesh Eswaran 01:52
Thank you, Janet, good to be here.
Samkit Tated 01:54
Thank you, Janet, thank you for having us.
Janet Wilkinson 01:56
So, before we dive into overlays and specific strategies, let’s start with some definitions. So, what is QIS and why is it such a core part of how institutional investors approach diversification today?
Akilesh Eswaran 02:13
So, QIS stands for quantitative investment strategies. These are data-driven, rules-based approaches that bring the power of automation to financial markets. So instead of relying on human judgment alone, QIS uses transparent algorithms to capture specific investment themes. For institutional investors, QIS offers a consistent and cost-effective way to implement proven investment ideas in partnership with banks. They effectively leverage the technological infrastructure of banks, and banks take away a lot of the operational burden involved in investing. This allows investors to focus on what they're good at and what their core skill is, which is basically investing and decisions of asset allocation and managing where they allocate risk, and leave the hard part around operational and technology and collateral management to banks.
Janet Wilkinson 03:12
QIS has been around for over two decades, but it's evolved quite a lot. Can you walk us through how it started and how it's expanded over time and why?
Solenn Le Floch 03:24
QIS really started as a way to bring hedge fund-style strategy, like trend following or volatility carry, to a broader set of investors, in what we call a more transparent and whole-base format. At first, the focus was mainly on single asset class risk premium and the strategies were relatively simple. Over time, it's grown a lot. We have seen a huge expansion in terms of complexity and scope. So today, QIS cover multi-asset, multi- strategy approach. And so, it's no longer just about traditional risk premium. We now see ESG-linked strategy, thematic basket, or highly customized solutions specifically for clients looking for more defensive or capital-efficient exposure. That evolution has been driven by different factors, I would say, better technology, more data, and a clear shift in what investors are looking for, so cost-effective, transparent strategy that they can tailor to their specific needs.
Janet Wilkinson 04:35
And what does the market look like today? How large is the QIS space and who's using these strategies and why are they using them?
Solenn Le Floch 04:45
The QIS space today is massive, massive. We are talking about a trillion-plus dollar market globally. It's been used by a really wide range of investors. So, we have pension firms, insurance companies, sovereign wealth funds, private banks. They're all using QIS for different reasons. Some, it's for return announcement. Other, it's for hedging or also portfolio diversification. There is also, I would say, growing interest from retail intermediaries wanting access to institutional-style strategy, but with better governance, also daily liquidity and lower cost. So increasingly, what I can see seems more like sponsor or corporate clients getting involved too, on the top of its institutional clients. For them, QIS can offer a capital efficient way to manage short-duration asset, de-risk pension exposure or make tactical asset allocation move without impacting their balance sheet too much. Overall, Janet, I think QIS has really become a mainstream tool, not just a niche solution. It's playing a central role in how investors build and manage portfolios today.
Janet Wilkinson 06:00
And moving onto RBC, how has RBC positioned itself in this space? What's distinctive about how we approach QIS and overlays?
Samkit Tated 06:09
First of all, we lead with innovation, be it an alternative approach to balance beta construction or thinking about how to harvest a specific risk premium. We try to think from first principles. What can we do better? How the implementation can be more robust and agile? Secondly, QIS is a lot about the platform. We have made a conscious effort in building a strong platform that can be leveraged to design custom solutions. It provides a toolkit consisting various building blocks, and then we work with institutions to identify their unique objective and accordingly offer a bespoke solution. It's like QIS is usually fully systematic, but it doesn't mean that you can't change anything once the trade is done. Market dynamics will change, and what our robust platform allows is to offer customization capability even during the trade, without having to unwind the existing swaps and then rolling them into a new one. Thirdly, like at RBC, we don't think about partnership just before putting on a trade with an institution, but it's also about making sure that the partnership lasts throughout the lifecycle of the trade, which means that we work continuously with our clients to make sure that strategies are reviewed periodically. If there are any market dynamic changes, then you can adjust these strategy parameters or completely revamp the portfolio altogether. And to top it all, RBC is one of the highest rated banks on the street, and that's why clients want to trade with us. They want to make sure that the partner that they have will be around to help them even in difficult periods.
Janet Wilkinson 07:48
Putting clients at the heart of everything we do, how are institutional clients using defensive overlays today, and what kind of problems are they solving in the current environment?
Akilesh Eswaran 08:02
So, we have indeed seen a consistent investor demand on hedging. Large asset owners are really concerned about drawdown mitigation as well as the cost of mitigating these drawdowns. So, we've had a rally back in risky assets. Equities are back at close to their all-time highs, and we really see that clients are increasingly focused on ensuring that any of these hedging overlays perform in specific risk off scenarios by asset class, so they're really careful in considering the choice of instruments used in these overlays, but also focused on reducing the resulting basis risk on their hedges versus the potential negative performance in the asset class that they're looking to hedge. So, they really do want to make sure that if they are looking at an equity down scenario, for example, that the overlay really performs in this equity down scenario. Or equivalently, if they're looking at a risk off in other asset classes, whether it's rates, FX or commodities, that the overlay hedges they put on, do perform in these down scenarios. And they really also focus, in addition, on ways to lock in any gains that have been made on these overlay strategies during the performance of the risk-off period, because we've often seen scenarios over the last few years, particularly post-COVID, where not locking in gains on these hedges has proved to be pretty costly in the long run, as you give up any of the potential upside on the hedges and continue to pay on the negative carry if you just leave them on without locking them in.
Janet Wilkinson 09:37
And now, all about volatility. Volatility has taken on a new shape: less about steady trends, more about sudden dislocations. That's made hedging more difficult from a cost, liquidity and timing perspective. So, how are clients using defensive overlays to manage those risks, especially across different types of market corrections and in the face of so much volatility.
Samkit Tated 10:07
Absolutely Janet. As Aki also mentioned, like, market timing is really difficult, like, not just in terms of predicting when to put on a hedge, but also to decide when to unwind those positions. And where QIS helps is design systematic strategies that sort of takes this timing risk away a little bit and also offers ability to lock in the gains that strategy has made during stress periods. And another drawback of traditional hedges, like put options, is that they provide protection in a defined period and only beyond defined strike level. You can have a scenario where you buy put option, and from that point onwards, market rallies by 20% and then it falls by 20% again. So, a simple put option is not going to provide any protection in that 20% fall in the later half, especially if that sell-off occurs late in options tenor. So what QIS helps with is solve some of these drawbacks. It offers a systematic solution that provides downside convexity without being too punitive in normal market conditions, it takes that timing risk away to large extent, and as a result, clients are increasingly using QIS overlays to run systematic hedging programs. It provides that operational ease, reduces timing risk, takes human emotions out. It also allows them to tap into cross-asset offering, even if they don't have in-house capabilities in all asset classes. We are not saying that hedging has to be fully systematic. Clients can still play their views tactically and use QIS overlays as a complementary hedging tool that can help them in unexpected scenarios where they might get caught off guard.
Janet Wilkinson 11:47
And as we look at specific QIS strategies, what are some of the most widely used overlay strategies, and how do clients think about trade-offs when choosing what's right for their portfolio?
Samkit Tated 12:02
That's an excellent question. So, one of the most popular overlays historically has been zero cost collar overlay, where you're buying protection by giving up some of the upside above certain level, and even if the collar is zero cost at inception, the cost you end up paying is by giving up the upside in strong market rally periods, which we saw post-COVID in 2021 and also in 2023 and 24. And this is where QIS overlay can be more effective, I think. Different things can work differently in different scenarios. Some things will work really well in rapid sell off, like COVID correction, things like long ball strategies, that hedge foot ratios, fixed call overlays, but in other market corrections, like we had in 2022 which was a very gradual grind down scenario, trend following strategies, simple rolling puts or collider overlay might work better. Additionally, we have also seen intraday momentum strategies have been very popular, especially on tech heavy benchmark NASDAQ index, and it also complements the traditional CT allocation really well, because it can react much faster when the trend is reversing from positive to negative or vice versa. So overall, if you know the scenarios that you want to protect, then it might be easier to pick one or the other strategy from the QIS toolkit. Otherwise, there is no one solution that fits everything. Nobody knows what next correction is going to look like. So, it might be more prudent to have a diversified portfolio of different types of defensive strategies. And then coming to your second question, how do clients think about trade-offs in choosing what's right for their portfolio? As I said, it starts with us discussing with them what their objective is, then analyzing cost versus benefit, like, what's the reactivity or defensive alpha that you are getting by these strategies or overlays in stress periods, versus what's the cost that you end up paying to hold the strategy income market regimes? Because hedging is like buying an insurance, right? Like, it's very well understood that it will have some cost in calm periods, but QIS overlays can help to reduce this cost and also mitigate timing risk to a large extent. The cost of holding these overlays can be further reduced by adding some orthogonal carry strategies in the portfolio, like commodity carry. And another criteria that clients might think about is how complex the overall solution is. The strategy or the portfolio that you are designing should not be overly complicated. Clients want to understand the scenarios where it will work and also scenarios where it might not work as intended. So, there are variety of things that clients to consider, to find a solution that works for them.
Janet Wilkinson 14:42
How are overlays supporting clients where market liquidity is a challenge or where long-term stability is a top priority, like pensions or LDI-focused allocators?
Solenn Le Floch 14:54
That's a great question, Janet, and overlay are incredibly helpful in exactly those situations. When liquidity is tight, overlay allows clients to adjust their exposure or add protections without having to touch their physical asset. And it's a huge advantage during time of market stress. For long term investors like pensions or LTAF-focused allocators, I think overlay helps them manage risk, like equity drawdown, for example, interest rate mismatch or inflation exposures, all while keeping somehow the co-liability-driven strategy intact. Having a strong, reliable credit partner is key, not just for executions, but for the overall risk profile of the strategy. Ultimately, overlays offer, I will say, precision, flexibility and resilience, and when backed by a solid credit partner, like RBC, they become an even more powerful tool for long-term portfolio management.
Janet Wilkinson 16:06
To the panel, as you look ahead, what's next for defensive overlays and systematic strategies. How is the landscape continuing to evolve? Where do you see innovation happening?
Akilesh Eswaran 16:20
So, as you know, Janet, the exciting thing about QIS is that it's really a constantly evolving product. The initial QI strategies are probably developed well over 30 years ago, but ever since then, as we've grown in our ability to automate and use technology to improve the implementation of these strategies, we get better and better at reducing slippage versus specific objective functions that these strategies are meant to meet. There's also been a continued drive towards cross-asset innovation, so where advances in some asset class can be applied to other asset classes. For example, one of the big points around defensive overlays is how you actually generate convex returns without paying too much for it. So there has been lots of work done in the equity world around how you could use volatility to generate some of these convex returns. And some of this work’s naturally extended to areas such as rates or FX. And that's been one, one big area where kind of see technology in the process that will drive innovation. Also, I think there's going to be a clear use of AI and machine learning in the QIS space. This is, I'd say, a bit of a greenfield area at the moment. AI has been changing very rapidly, but it also has a bit of a black box nature. One of the ethos of QIS’ strategies is that they're very transparent, rules-based; there's very little discretion or unknown in how a strategy operates and performs. But with AI, you do get a bit of a black box approach. But on the other hand, AI is very good at looking at data, assimilating it and reacting to it much faster than the average human. So, I do feel that it's inevitable that AI is going to be transformative in the QIS space too, and – and we will see some strategies in the future look quite different to what they do today.
Janet Wilkinson 18:15
Thank Solenn, Akilesh and Samkit, for an insightful discussion on how QIS and defensive overlays are helping institutional clients navigate uncertainty with more confidence. For our listeners, if you want to learn more about these strategies or RBC’s platform, please reach out to your RBC representative. We look forward to continuing the conversation in future episodes. And thanks to all of you for listening to the Partner of Choice podcast, from RBC Capital Markets podcast. This episode was recorded on Friday, 16 May 2025. If you enjoyed the podcast, please share the podcast with others. And thanks for listening today.