QIS: a transparent, liquid, diversified and growing investment toolbox with a multidimensional value proposition

With a new surge in popularity through the pandemic, trades linked to Quantitative Investment Strategies (“QIS”) have grown consistently over recent years, reaching close to US$400 billion worth of assets according to recent estimates. They are now purchased by a wider range of investors, which used to be viewed as competitors. Natixis Corporate and Investment Banking’s Guillaume Calvino, Global Head of Equity Structuring for Global Markets, discussed the benefits of QIS and why they have risen to prominence.

Guillaume Calvino

Global Head of Equity Structuring, Global Markets 

Quantitative Investment Strategies are transparent, rules-based, liquid, and cost-effective investment strategies which generally take the form of indices. They are developed across all major asset classes in financial markets (equities, currencies, interest rates, credit, commodities) and across an ever-expanding range of investment thesis.

They are part of Global Markets’ investment solution structuring toolbox. They can be provided as atomic building blocks or as a diversified portfolio, and can be packaged in different formats: direct access through an unfunded swap, leveraged note, (actively managed) certificate, fund wrapper, underlying of an option… to name just a few.

Purchased by a wider range of investors including, QIS can be deployed to achieve different investment objectives.

QIS can be deployed to achieve different investment objectives and as such, provide a multidimensional value proposition. A few examples:

  • Some strategies are designed to generate strong positive returns during severe market dislocations, while minimizing the cost of holding them in a portfolio during normal market conditions. While they performed extremely well during the sudden Covid-19 market crash for instance, they may not protect an investment portfolio during a mild equity bear market.
  • Other strategies will tend to perform well in environments where both equities and bonds suffer, offering true diversification without sacrificing liquidity. 2022 was a recent example where such strategies shone.

Another example is the family of strategies which aim at generating attractive risk/return profiles by taking advantage of the difference between implied and realized volatility in option markets, potentially across all asset classes

There is no silver bullet though:  investors still need to  understand the investment thesis underlying a particular investment strategy and how it can fit within an existing portfolio.

QIS are not a silver bullet – investors must understand the thesis underlying the strategy and how it can fit within their portfolio.

A good question to consider is why a particular strategy would be expected to continue to work in the future, and under what market conditions.

Sometimes, the rationale can be grounded in behavioral finance theories, such as structural cognitive biases and/or specific constraints financial markets operators may have (e.g. minimizing the tracking vis-à-vis a benchmark, or leverage constraints).

The performance may also be linked to the systematic compensation of a certain type of risk; in such a case it is worth considering whether the return for bearing the risk is priced attractively - and if it is, why certain traders are willing to pay such an attractive level.

Beyond academic risk premia, there are strategies which take advantage of structural imbalances between supply and demand in derivatives markets, sometimes due to flows arising from investment banks hedging their structured products portfolio.

Finally, a superior access and/or treatment of information can provide an edge, and recent advances in AI provide an exciting area for research.

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