Derivatives house of the year, Asia ex-Japan: Credit Suisse

Asia Risk Awards 2019

Stephane Goursat, Credit Suisse

Credit Suisse

Multi-asset strategies have found favour with institutional investors in a year that has seen multiple market dislocations and breakdowns in traditional asset class correlations.

Yet sometimes investors feel there is a want of transparency in multi-asset funds that leaves them with a sense of being in the dark. The markets move, and the value of the fund’s assets change, but investors endure a long wait for a statement to check their risk and exposures.

A suite of fund strategies in index wrappers that Credit Suisse has pioneered, through partnerships with asset managers such as GAM, Rayliant Global Advisors and M&G Investments, switches the lights on for institutional investors. The bank also introduced its quantitative investment strategies (QIS) to hedge risks in a volatile market. This proved particularly effective during equity market slumps in 2018, and this year have actually boosted returns.

These were among solutions that came to the fore in uncertain markets and were pivotal for the bank to win the ‘Derivatives house of the year, Asia-ex Japan’ award for the second consecutive year.

Clients say the bank’s ability to offer QIS strategies and indexes are a testament, not only to the Swiss bank’s skill in structuring simple yet effective investment solutions, but also its strong relationships and networks across the Asia region.

“Our index solutions clearly satisfy a growing demand for transparent and customisable strategies,” says Stephane Goursat, head of investment solution sales for the region, “particularly when enhanced with elements that are de-correlated from traditional asset classes.”

Take, for example, the index Credit Suisse launched in partnership with M&G Investments. It utilises a valuation-driven asset-allocation strategy blended with a tactical behavioral approach to take advantage of episodic periods of market volatility. The index is currently being distributed to investors via both firms’ extensive local channels in north Asia.

In the same vein, the index launched with GAM is rules-based and discretionally managed by the asset manager. Launched in the fourth quarter of 2018, the index has an allocation strategy that includes an investment universe spanning equity, fixed income, commodities, foreign exchange and alternatives.

A third index Credit Suisse developed with Rayliant Global Advisors earlier this year aimed to meet a demand for exposure to China’s rapidly internationalising onshore equities market.

The success of these indexes owes much to Credit Suisse’s unique technological ecosystem, which comprises numerous proprietary platforms that can support cross-asset transactions. This year, internal platforms have also been leveraged for a new purpose, allowing, for example, a client to use its front-end quantum system to create, customise and execute a risk premia index by itself. 

These strategies came to the fore for institutional and private banking clients as concerns over the health of the global economy mounted and stoked equity volatility late last year.

For example, the GAM partnership was a perfect fit for that climate, for several reasons. First the allocation strategy, which leans on a multi-asset universe including alternatives, is balanced with the aim of achieving equity-like returns while controlling downside risk.

The index did perform as expected. When US equities dropped 9.1% in December 2018, the GAM Credit Suisse multi-asset index remained relatively flat.

The index format is, in itself, valuable to investors when the markets turn choppy, too. A range of customisable wrappers are used to deliver a synthetic exposure to the investor. These wrappers include total return swaps, derivatives with which the client pays a set rate and the bank makes payments to the client based on the return of the asset allocator’s investment strategy.

The asset management partner shares the asset allocation with Credit Suisse, which is then able to deliver exposure to investors without them needing to invest their funds directly. Investors say that the beauty of this format is that it offers greater transparency and flexibility than a fund investment. In periods of market uncertainty that can be very reassuring to have, they add.

“We are obviously dealing in a very volatile environment, day-by-day, even tick-by-tick, so we have been looking at multi-asset strategies as a way to manage risk,” says an institutional investor in Asia. “This is a very neat way of getting that exposure. In the sense that I don’t have to invest in a fund, I don’t have any operational risk, and because of the way the exposure is implemented through an index it is very cost-efficient.”

“It is also very transparent because I know what my exposure is in real time, whereas with a fund I have to wait for a statement, which even then does not tell me everything,” the executive says. “And say I want to reduce my exposure, it can be done straight away; if you redeem your investment with a fund, the manager has to first sell the underlying and that can be very cumbersome. With this we can quickly scale up and scale down our exposure depending on where the market is moving.”

We are obviously dealing in a very volatile environment, day-by-day, even tick-by-tick, so we have been looking at multi-asset strategies as a way to manage risk. This is a very neat way of getting that exposure

Institutional investor, Asia

Establishing partnerships with well-known asset managers to deliver index investment solutions to institutional clients was a big achievement for Credit Suisse.

Asset managers typically try to safeguard the nuts-and-bolts of their asset allocation strategies with a third party, such as an investment bank. But for an index solution like this to work it is necessary for the money manager to share all of that information with Credit Suisse.

“Credit Suisse helped us to find the right manager,” says an institutional investor. “Some managers will say this is proprietary investment strategy – why would we share it with a bank? Sometimes with these managers, they can be quite guarded when it comes to their asset allocations.”

With its slew of asset manager partnerships, Credit Suisse found an asset allocator who appreciated both the uniqueness of the product and its value to investors, allowing the two parties to agree to a co-distribution model. That has been a win-win for both parties: Credit Suisse brought in its private banking clients and the asset manager brought along its institutional clients.

“Finding the right asset manager with the expertise ‘du jour’ then becomes crucial. The successful partnerships we have had this year precisely met clients’ growing demand for multi-asset strategies, alternative investments and exposure to emerging markets such as China,” Goursat says.

A quant strategy for China

Another multi-asset index made possible by Credit Suisse’s unique ability to find and strike partnerships with asset managers is the Rayliant Index, which was launched this year to offer investors an exposure to quant strategies in China’s onshore equity market.

With China’s equity markets now rapidly internationalising, the bank has noticed a large surge in demand for exposure to China’s domestic shares, otherwise known as A-shares. 

Similar to the index launched with GAM, Credit Suisse takes an allocation that Hong Kong-based investment manager Rayliant decides through the application of a fundamental insights-enhanced quantitative analysis of the way in which A-shares trade.

The index can allocate to the top 300 large-cap stocks traded through the Hong Kong-China cross-border stock-connect scheme and will typically focus on 80–100. Stocks with poor liquidity are excluded and concentration risk is managed by capping single-stock weights at 5%.

Then the bank wraps the allocation in an index to provide long-only or long-short exposure to investors, using total return swaps and Delta-1 certificates.

“For instance, investing in an emerging market like China calls for a specific understanding of local behaviour, especially because the Chinese stock market is mainly dominated by retail investors,” says Goursat. “This is what the Rayliant Index aims to do, enhancing quantitative methods with fundamental insights to capture systematic alpha.”

For its investors, the benefit of this index format over an investment fund are the same as other indexes launched in partnership with lower fees, greater transparency and flexibility.

For this particular index there is also a risk management benefit for Credit Suisse, however. It allows the bank to recycle its A-share inventory by providing derivatives to hedge funds, thereby extracting the full value of trading through an index, and pushing the cost for end-investors to close to zero. 

QIS solutions

The bank also introduced its QIS solutions for risk management, and these proved their worth during the two instances last year when equity markets slumped. The solutions that the bank put forth helped hedge against tail risk, which has typically proven to be costly for clients as it amounts to providing protection against events that are generally considered unlikely and hence cannot be easily validated statistically.

Credit Suisse introduced the tail hedging component in its alternative risk premia index solution in 2018 as one of the buckets to manage risks. This bucket provided the tail hedge exposure to options and hedges against drawdowns of the risky asset component in the index during extreme, tail-market dislocations. Another bucket of the strategy was the risk premia component on carry reduction, which is used to finance the cost of hedging by investing into uncorrelated strategies. 

The solution weathered the volatile bouts over the past year and thereby reduced risk for clients and at the same time gave them outperformance, says Goursat. The bank has evolved the strategy this year to meet changing markets, which has provided the outperformance this year, he says.

Leveraging ‘One Bank’

The bank’s platform and its ability to ensure various departments—markets, investment banking and private banking—worked in sync has been crucial for the success of the strategies.

For example, Quantum, a front-to-back platform for actively rebalanced indexes providing features such as automated reporting, price calculation and booking, has been crucial to Credit Suisse in the index solutions investment it launched in 2018 and 2019.

“Clients trust our platform’s ability to deliver and are attracted to our diverse offering of investment managers across various strategies,” says Goursat.

Credit Suisse’s ability to deliver cross-asset solutions to clients has also been further facilitated by an internal restructuring of the bank’s regional business effected in April 2019. Through this restructuring, a new division that the bank calls Asia-Pacific Trading Solutions was established, bringing the bank’s institutional solutions business under one leadership. ATS was set up, the bank says, with the specific aim of serving regional clients with quick-to-market cross-asset solutions.

Leveraging on the cross-divisional integration of its markets, private bank and investment management teams Credit Suisse has also proved valuable. The ‘One Bank’ strategy, says Goursat, was crucial to the development of the Global Yield Balanced index, a ‘long only’ global multi-asset index that aims to deliver returns at a lower volatility than the overall market.

As of March 2019, the Global Yield Balanced index has been able to deliver a net return to investors of 3.12% in comparison to a peer average of 1.4%.

“Via a ‘look-through’ approach offered by actively-managed indices, investors themselves are educated on how to manage portfolios and gain personal insights into the world of investment management,” Goursat says.

“The asset managers we work with in turn gain access to our strong network of both institutional investors and private banking clients – a classic example of Credit Suisse’s successful ‘One Bank’ framework.”