Societe Generale and Raise Partner take up the challenge of systematic risk management


In the current market environment of increased volatility, zero rates and high valuations, investment opportunities are becoming scarcer. In this context, Quantitative Investment Strategies (QIS) offer interesting prospects. These strategies apply systematic trading rules to liquid assets. They remunerate investors who take risks that cannot be hedged or diversified. And they have the advantage of being uncorrelated from the financial markets over the long term.

For some years, however, the correlation structure of financial markets has been changing and unusual episodes have been occurring with increasing frequency. This summer, for example, the rise in equity prices was accompanied by an increase in implied volatility, a very rare pattern in derivatives markets. And the collapse of prices in risky assets is increasingly followed by no less spectacular rebounds. 2020 is striking proof of this.

These regime changes are difficult to predict and are a source of uncertainty for fund managers. Risk management and the consideration of extreme events are becoming a central issue in portfolio management. In this context, Societe Generale's Cross-Asset Quantitative Research team is exploring innovative methods of portfolio allocation on systematic strategies, taking into account not only extreme risks but also the evolution of the leverage of these strategies on the markets. "We want to go beyond traditional approaches that focus on long-term risks by adding the analysis of short-term and extreme risks. Traditional risk management focuses on analyzing the performance of strategies. We want to integrate granular information on the positioning of these strategies on the underlying assets", explains Sandrine Ungari, Head of Cross-Asset Quantitative Research at Societe Generale.

In order to move forward on this, the Bank's quantitative research team asked Raise Partner, a Fintech that was selected for the second promotion of the Global Markets Incubator (GMI), Societe Generale's incubator dedicated to Fintechs specialising in market activities, at the beginning of the year. Raise Partner has specialized for 20 years in portfolio optimization and risk management for institutional clients. Over the past three years, and after a reorientation of the company's strategy, Raise Partner has bundled its solutions into an easy to integrate and fast to use programming interface (API). From the very first exchanges, the spark was there between the two parties whose activities are complementary. "Raise Partner provided its expertise to our quantitative research and vice versa in the development of an innovative approach to risk management on which we wanted to collaborate" , said Antoine Connault, Head of Global Markets Incubator. "Being part of GMI has given us access to a high level of collaboration with a major bank and its world-renowned quantitative research team and a common approach to our niche expertise in portfolio optimization" , said Sophie Echenim, President of Raise Partner.

During its incubation, Raiser Partner worked with Societe Generale Cross-Asset Research on the identified use case: how to optimally allocate risks in a portfolio of systematic strategies while controlling the total leverage on certain sectors, certain risk factors?

The method developed by Raise Partner is based on the look-through approach of strategies positions. This required a significant optimization work since the exercise was being carried out on a portfolio comprising trend-following, carry and equity factor strategies, based on a large number of underlying assets (equities, foreign exchange, commodities, interest rates, bonds). In addition, there are constraints on risk exposure by type of instrument, by country or by factor. The fintech's expertise has enabled Societe Generale to make faster progress on this subject and to propose a solution combining the analysis of long-term risks, taking into account changes in correlation regimes, and the risk of short-term gaps. "The innovative aspect of the approach consists in enriching the data samples with atypical scenarios and focusing on tail risks. The results show the importance of portfolio construction work and its key role in alpha generation" , adds Sandrine Ungari.

"By benefiting from the support of our quantitative research in this collaborative project, Raise Partner has demonstrated its ability to transform its expertise into disruptive risk management optimization solutions and to build an innovative offering in this area", said Guillaume Arnaud, Head of Quantitative Investment Solutions at Societe Generale.

The results of this joint work will be presented at the Derivatives Solutions Conference organized by the Bank in October.

This collaboration is taking place against a backdrop of strong demand for systematic strategies from investors seeking alternative returns. As a specialist in derivatives and multi-asset solutions, Societe Generale has a strong presence in this area and uses its research and engineering capacity to develop tailor-made and innovative QIS solutions for its customers while meeting the diversification challenges of its investment solutions.