Increasingly sophisticated strategies
More than 30 years since the first quantitative investment strategies (QIS) emerged, a growing range of investors are harnessing the power of these data-driven, rules-based approaches.
Initially, QIS offered relatively simple ways to introduce institutional investors to hedge fund-style strategies. Today they are delivering highly-customized solutions to an ever-widening investor base.
QIS removes much of the human emotion from investing by using transparent algorithms to capture specific investment themes, explains Akilesh Eswaran, Global Head of QIS.
“For institutional investors, QIS offers a consistent and cost-effective way to implement proven investment ideas in partnership with banks,” he says.
“QIS offers a consistent and cost-effective way to implement proven investment ideas in partnership with banks.”
Akilesh Eswaran, Global Head of QIS
A wider investor appeal
A huge expansion in the complexity and scope of QIS has created a $1 trillion-plus market, adds Solenn Le Floch, Managing Director, Global Markets Solutions.
Pension firms, insurance companies, sovereign wealth funds, and private banks are all using QIS for hedging or portfolio diversification. There is growing interest from retail intermediaries, who seek access to an institutional-style strategy that also offers better governance, daily liquidity, and lower cost. Sponsors and corporates, too, are favoring QIS as a capital-efficient way to manage assets without disrupting balance sheets.
“QIS has really become a mainstream tool, not just a niche solution,” she adds. “It’s playing a central role in how investors build and manage portfolios today.”
“QIS has really become a mainstream tool, not just a niche solution.”
Solenn Le Floch, Managing Director, Global Markets Solutions
Reducing risk, preserving gains
RBC has seen clients increasingly use QIS overlays to run systematic hedging programs. They provide extra assurance of performance in specific risk scenarios.
“Market timing is difficult, not just in terms of predicting when to put on a hedge, but also to decide when to unwind these positions,” says Samkit Tated, Director, QIS Structuring. “Where QIS helps is by designing systematic strategies that reduce this timing risk and offer the ability to lock in the gains made during stress periods.”
This has proved helpful in sectors such as pensions and liability-driven investment, says Le Floch: “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 times of market stress.”
Zero cost collar and intraday momentum are among the QI strategies most widely used to protect potential downside. But unless investors are concerned about a specific scenario, there is no one-size solution, Tated explains.
“Nobody knows what the next correction is going to look like,” he says, “so it might be more prudent to have a diversified portfolio of different types of defensive strategies.”
“QIS helps by designing systematic strategies that reduce timing risk and offer the ability to lock in the gains made during stress periods.”
Samkit Tated, Director, QIS Structuring
A fast-evolving space
RBC Capital Markets anticipated the growing popularity of QIS, constructing a platform designed to deliver bespoke client solutions. That extends to real-time changes to reflect market conditions.
“QIS is usually fully systematic, but that doesn’t mean you can’t change anything once the trade is done,” says Tated. “Market dynamics will change, and our robust platform allows us to offer customization capability even during the trade, without having to unwind the existing swaps.”
QIS solutions continue to evolve, says Eswaran, with new advances being shared across asset classes. For example, work on using volatility to generate convex returns in equities is now being applied to areas such as rates and FX.
Eswaran also foresees artificial intelligence pushing the field forward, despite the contrast between AI’s ‘black box’ nature and the transparency that characterizes quantitative investing. “I do feel that it’s inevitable that AI is going to be transformative in the QI space,” he says.
