Nathalie Texier-Guillot is head of U.S. equity derivatives structured sales at Citigroup Global Markets. That means she helps pension plan sponsors, asset managers and insurance companies find alpha and manage their trading risks using customized options and other equity derivatives.
The executive recently sat down with Traders Magazine to discuss the state of play in over-the-counter equities derivatives. We offer some excerpts in two parts.
Here, Texier-Guillot argues derivatives desks such as Citi’s can provide services to asset managers that are similar to those of hedge funds, but lower in cost and more liquid.
TM: Public pensions are becoming more attractive?
Texier-Guillot: Because of the poor performance of hedge funds or external managers, public pensions are looking at ways to bring back in-house the management of their portfolios. That also has to do with their need to reduce costs.
TM: Any examples?
Texier-Guillot: Last year, we saw two large Scandinavian public pensions do this. In the U.S., you have multiple examples of public pensions bringing back their management. They are starting to rebuild large investment teams for both strategic asset allocation and tactical asset allocation. There is a huge opportunity for dealers like us to enter into strategic partnerships with pensions. That’s not only in equity derivatives. It’s the whole spectrum of derivatives.
TM: I gather you see opportunities to compete with the services of hedge funds.
Texier-Guillot: For pensions and asset manager … If they don’t have an investment team, then one way for them to have access to a strategy-if they don’t want to invest in a hedge fund, for example-is to use a rules-based strategy. This is basically an overwrite strategy, or a hedging strategy, packaged by dealers. That’s a huge opportunity for many dealers. You’ve seen major moves by many dealers trying to leverage what’s been accomplished on the options side to package a strategy with the idea of trying to improve the Sharpe ratio of the strategy.
TM: I see.
Texier-Guillot: One of the major issues that a pension or asset manager has is with the volatility of the strategy and having someone dedicated to the strategy. So, let’s say you get a signal-a technical or macro-based signal-that would tell you that you need to tweak that strategy one way or the other. Your choice is to pay 2% and 20% to a hedge fund who is a specialist in the strategy. Or you can pay us a much lower fee for the same service. And you accomplish the same strategy with a better Sharpe ratio.
TM: You also offer a way for money managers to construct a portfolio that performs like a hedge fund investment but is more liquid.
Texier-Guillot: Yes. This is the LRP, or Liquid Replication Portfolio. The idea is to be able to reconstruct and create a proxy portfolio for an illiquid portfolio. Pensions, asset managers, even insurance companies…In their search for alpha, have been investing in private equity, real estate , infrastructure…These strategies do provide additional alpha compared to equities, but they are illiquid and the volatility of such portfolios can be quite challenging to manage properly. Our LRP is a potential alternative to allow investors to mitigate the illiquidity issue along with the volatility of the strategies.
