The Review — 02/08/2018 at 15:00

Capturing Emerging Dimensions of Risk and Return

by

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As head of Goldman Sachs Securities Division’s Americas Equity Structuring Group, Stacy Selig and her team apply a mix of quantitative, technical and problem-solving skills to create solutions for investors when there’s no readily available product on the market. We sat down with Stacy who explained how changes in market structure continue to drive demand for structured products and equity derivatives — as well as boost the types of jobs available on Wall Street.

It seems like we are seeing more market moves that aren’t easily explained. What’s driving that?

Stacy Selig: We’re in the midst of a multi-year change in market structure. Investors have long relied on macroeconomic factors to explain market moves. But 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. 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 past few weeks have been a difficult period for some quantitative managers. What do you make of the recent market moves and how is your team working with clients during this period?

SS: In recent weeks, we’ve seen a number of quantitative funds and fundamental managers experience losses. During that time, clients looked to us 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.

We have built models that can isolate the exposures of their portfolios and explain the drivers of their performance. These same tools also allow us to deliver customized products that provide investors with exposure to certain returns or hedges of specific risks. 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. Generally, as the market continues to mature and evolve, investors look to our team to help them generate returns or create customized hedges that are difficult to reconstruct on their own or through already available products. They are also looking for access to the tools themselves. Externalizing 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.

How have the changes in market structure affected the types of roles that are available on Wall Street?

SS: Because of the complexity of the market, there’s strong demand across Wall Street firms for so-called “sales strats and structurers.” 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. The rate of change across data, technology and regulation is only accelerating the demand for these roles across the financial services industry.

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, 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. It’s a popular option for people who like to work with clients to solve complex problems.


Read this great Interview on BRIEFINGS from Goldman Sachs


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