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Asset Management Research - December 20, 2011

The strategies of Asian institutional investors are being challenged - an interview with Pierre Trecourt

In this month's interview, we talk to Pierre Trecourt, Head of Fixed Income Solutions & Institutions for Asia Pacific at Société Générale, about a study recently released by EDHEC-Risk Institute, entitled "Structured Equity Investment Strategies for Long-Term Asian Investors," the use of volatility targeting, SG CIB's plans for the Asian region, and their support for EDHEC-Risk Institute's research.

Pierre Trecourt

EDHEC-Risk Institute has just released a study looking at the design of structured investment strategies and at their relevance for long-term investors. The study was conducted with the financial support of SG CIB and focused on Asia. Why do you think this topic, these investors and the region deserve research attention?

Pierre Trecourt: Asian institutional investors are generally more focused on equity investments versus their peers in Europe and US. However, the strategies of these investors are currently being challenged, not only have they been affected by high levels of volatility over the last few years, but also by more stringent regulatory capital framework regulations.

In order to help Asian investors to capture the performance of Asian equity markets and address their regulatory capital requirements, we asked EDHEC-Risk Institute to conduct a study based around the effectiveness and implementation of volatility controlled strategies – with a focus on Asia.

We are pleased to have contributed, as we feel that this piece of research is at the cross-roads of practitioners’ solutions and scholars’ analysis. We hope that it will help investors and financial researchers alike, to understand how and why our long-term approach to equity structured products can create value, particularly in reference to the Volatility Target mechanism. It is worth pointing out that the research has been conducted independently, with no prior constraints, nor any predetermined outcome.

The study looks at the control of volatility as an objective and assesses various strategies to pursue this goal. From a theoretical standpoint, a constant volatility portfolio is a key building block for asset allocation in a dynamic setting with stochastic volatility. As a practitioner, do you see a need and demand for volatility targeting?

Pierre Trecourt: Let me start by briefly outlining how a control of volatility works. The idea is that the strategy systematically adjusts the exposure to a selected underlying (a stock, fund, index, basket of stocks etc.) according to the evolution of its realised volatility. Realised volatility is used as a measure of risk; the principle being that during periods of high volatility the exposure to the underlying is reduced and vice-versa. Using this strategy creates two potential benefits for investors.

Firstly, equity market downturns generally cause high volatility; by reducing the exposure to the underlying any drawdowns can be reduced. Secondly, the volatility control strategy aims at fixing the level of volatility of the underlying to a pre-determined level, using a dynamic exposure. This can help to lower the cost of options written on the underlying, leading to lower premiums for downside protection.

This allocation method became popular following the high market volatility of 2008-2009, and is now widely used in a large scope of investment products. This study is one of the first theoretical studies on this subject, especially concerning Asian markets.

Beyond this, what do you think are the study’s key results?

Pierre Trecourt:The study conducted by EDHEC-Risk is in line with current market sentiment: how can Asian equity markets be modelled using stochastic volatility?

This approach allows investors to analyse potential severe market shocks, like we have been experiencing, perfectly reflecting the concerns of Asian investors. The second aim of the study is to demonstrate the efficiency of a Volatility Target, used to optimise the risk-return profile of investors, within this framework. The results are actually quite impressive, introducing a Volatility Target asset allocation strategy can lead to a significant reduction in the downside distribution of the investment return.

While the study has important practical implications for long-term investors worldwide, it focuses on Asian equity markets and originated from discussions between our teams in Hong Kong and Singapore – what are Société Générale’s Corporate & Investment Banking's strategic directions in the region?

Pierre Trecourt: For Asia, we anticipate benefitting going forward from the continued growth in Asia, leveraging on the developments initiated in 2011, further organic expansion of our key franchises which are Cross-Asset Structured Solutions, Equity Derivatives and Natural Resources Financing. Therefore, we will continue our efforts in Asia to promote our core business of structured products through our cross-asset platform, and investments have been made to increase our market presence in many countries. For example, we have recently obtained primary dealer status for our Japanese government bond platform. Our Interest Rate & Fixed Income Derivatives push will also enable Société Générale Corporate & Investment Banking to leverage our research and trading capabilities to advise corporates on hedging and investment solutions.

The focus in financing activities will be on natural resources which is consistent with our regional strategy and the matching of needs in Asia with SG CIB's capabilities. The natural resources sector is of growing importance to Asia’s economy and SG CIB will play to its strengths in this area in terms of short, medium and long term financing

Overall, Société Générale Corporate & Investment Banking will accompany the development of Asian institutional investors and corporates through our origination-to-distribution model and our advisory capabilities.

SG CIB has recently been presented with a Global Award by Euromoney for its excellence in the field of structured investment strategies, why sponsor work by EDHEC Risk Institute in an area where you stand out and can be rightly expected to have a wealth of in-company talent?

Pierre Trecourt: One of the reasons that Société Générale Corporate & Investment Banking remains a leader in structured products is due to the constant innovation from its financial engineering, coupled with our ability to listen and react to clients’ needs. This innovation stems from our willingness to learn and remain open to any new findings, particularly those of an independent partner. This allows us to further our knowledge and to hopefully develop these ideas further.

By choosing an academic partner of such worldwide prestige we hope to give investors impartial evidence of why we believe in the solutions and strategies we are offering and providing them on a daily basis.

About Pierre Trecourt

Pierre Trecourt is currently Head of Fixed Income Solutions & Institutions for Asia Pacific at Société Générale. His main focus is the development and delivery of structured solutions to grow the business with institutional investors across Asia Pacific region and the strengthening of Société Générale's Fixed Income products capabilities. Pierre has over 12 years experience in Asia, with notably Société Générale and Credit Agricole CIB where he was lately Global Head of Credit Structuring. He has an engineer's Diploma from Ecole Nationale des Ponts et Chaussées in Paris as well as a Masters in Probability and Finance from the University of Paris VI.