Goldman's Marquee platform in the spotlight as institutional investors turn to structured products

The rise of systematic and quantitative investors in recent years has highlighted the importance of looking beyond macroeconomic factors, and has also opened up opportunities for structured solutions 'not readily available' where a mix of quantitative, technical and problem-solving skills are needed, according to Stacy Selig (pictured), head of Americas equity structuring group at Goldman Sachs Securities Division.

'(...) The rise of systematic and quantitative investors in recent years has highlighted the importance of looking at other, less fundamental factors to understand the markets,' said Selig, in a recent Goldman Sachs briefing. 'At the same time, a broader understanding of factor-based investing - which looks at certain traits such as size, volatility, value and momentum as predictors of returns - has added new dimensions for investors to consider both as an investment opportunity and as another driver of returns in their portfolios.'

The rise in volatility since the beginning of 2018 has hit a number of hedge funds that rely on complex quant algorithms that have struggled to make money, and have been rattled by recent macro events such as the US/China trade wars or the Italian election.

'In recent weeks, we've seen a number of quantitative funds and fundamental managers experience losses,' said Selig, adding that during that time, clients looked to the bank to help them understand whether these issues were caused by macro events - such as a rotation between emerging and developed markets, or a move from small-to large-cap stocks - or whether there were other systematic causes at play, such as their exposure to the momentum factor. 'In other words, they wanted to determine the potential causes of portfolio performance.'

Goldman has built models that can isolate the exposures of their portfolios and explain the drivers of their performance, according to Selig. 'These same tools also allow us to deliver customized products that provide investors with exposure to certain returns or hedges of specific risks,' she said. 'So, for example, an investor may just want to own Apple stock for fundamental, stock-specific reasons. Historically, those investors would hedge out market and sector beta. Now those same investors are taking factors, like momentum, into account when creating those hedges.'

Strats focus
Investors are seeking systematic strategies that can generate returns or create customized hedges that are difficult to reconstruct on their own or through already available products, according to Selig.
'They are also looking for access to the tools themselves,' said Selig. 'Externalising these portfolio tools and capabilities to our client base through Marquee - the firm's digital platform for institutional clients - has been a big focus for us.'

Selig also noted that because of the complexity of the market, there is strong demand across Wall Street firms for so-called "sales strats and structurers".

'The rate of change across data, technology and regulation is only accelerating the demand for these roles across the financial services industry,' said Selig. 'For structured products, in particular, because these solutions are multi-faceted, even "equity" products require a deep understanding of the other asset classes, such as currencies, interest rates, funding and credit. So you need deep and broad product expertise across the team.'

At the same time, the need for 'strats' specialists has increased because 'you have to create a solution that goes beyond a client's particular market view to take into account that client's specific risk tolerance, tax, accounting, regulatory and jurisdictionally driven needs', according to Selig.

'Our business, accordingly, has grown with the demand for the people, systems, tools and overall technology infrastructure to help identify, explain, access or hedge these newer dimensions of risk and return' said Selig. 'It's a popular option for people who like to work with clients to solve complex problems.'

Demand for systematic quantitative and risk premia strategies in the structured products market has increased recently as a result of institutional investors' disappointment with the performance of hedge funds. This has resulted in an increasing appetite for assets that provide uncorrelated exposure to the market but in a liquid and transparent way, and with lower fees, which has trickled down to the retail market.

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