SGI: QIS played a diversifying, defensive role in 2022

In the second of a two-part interview, Pierre Gimenes, global co-head of structuring for global markets at SGCIB, discusses the contributions of SGI’s QIS group in helping institutional investors (pension funds, asset managers, hedge funds, etc.) design and implement risk premia strategies with proprietary algorithms and in-depth research, and how the SGI YouTRack execution platform is increasingly sought by these investors to manage discretionary strategies.

According to Gimenes, QIS has been traditionally targeted at institutional investors because it provides a natural starting point to extract and implement risk premia from basic thematic strategies. However, it is a technical area that requires an understanding of sophisticated instruments.

“We have noticed recently that on the private banking side, discretionary portfolio managers have been more active in the QIS front as they seek to serve clients with different investment time horizon and appetite for complexity,” he said.

From an asset class perspective, there have been successful developments in 2022 - the bank’s SGI Step Index was deployed by several Swiss banks to extract carry from equity volatility. Several global asset managers traded the equity repo carry and rate volatility carry strategies developed by the QIS team.

“The rate volatility carry strategy is an interesting example,” said Gimenes. “This strategy leverages on the specific dynamics of the USD rates volatility market, where long-dated part is less expensive than the short-dated one. Positioning on the longdated volatility thus offers an opportunity to build a defensive position while benefitting from a time decay.”

SGI’s QIS team took advantage in 2022 of the fact that there is a lot of institutional investor activity on long dated callable bonds which are selling long dated rates volatility.

This explains the inverted curve as a result of the imbalance between supply and demand, according to Gimenes.

“Because of our cross-asset set up and global presence we are able to connect the dots and package strategies to take advantage of this kind of opportunity - cheap, long dated volatility has revealed beneficial over the past 18 months typically and was a good diversifier for global portfolio positions as equity and bonds fell,” he said.

Going long on bonds was not an effective hedge in 2022, so QIS strategies played a diversifying and defensive role in investor portfolios.

“More generally, the poor performance of the traditional ‘60/40’ portfolio in 2022 has been a wake-up call for global portfolio allocators to seek for alternative solutions to build defensive, decorrelated positions,” said Gimenes.

Smart beta

The other leg of QIS – smart beta – saw a continued decline as the initial focus from clients managing large portfolios on some fundamental factors such as equity value or equity quality shifted towards broader, cross-assets portfolio approach.

“Smart beta and equity factor investing did rely on fundamentals rather than on market imbalances, and they lacked a cross-asset dimension,” said Gimenes.

“We observed a gradual shift in interest from the pure equity (smart beta, factor-based) towards more diversified QIS