Nick Baltas - Multi-Asset, Multi-Strategy Portfolios (S7E3)
Dec 26, 2023
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Nick Baltas, managing director at Goldman Sachs, discusses using systematic strategies to solve asset owner problems, his research on cross-asset skewness and implementing a skewness strategy. He also shares insights on building multi-strategy portfolios and meeting client needs.
Tailor systematic strategies to client needs by considering defensive qualities, yield enhancement, and risk hedging.
Understand the significance of cross-asset skewness for downside risk hedging and recovery signals.
When constructing multi-asset portfolios, align portfolio design with a philosophy, compare signals, and consider signal mixing versus strategy mixing.
Deep dives
Using Systematic Strategies to Solve Asset Owner Problems
In this podcast episode, Nick Balthus, Managing Director at Goldman Sachs, discusses how he uses a broad range of systematic strategies to address the problems faced by asset owners. He emphasizes the importance of tailoring strategies to client needs and objectives, considering factors like defensive qualities, yield enhancement, and hedging against specific risks. Balthus also highlights the significance of risk budgeting and aligning the basis of risk in the signal itself in portfolio construction. He suggests that different strategies should be mixed based on their similarity in nature, whether they are directional or cross-sectional signals.
The Nuances of Cross-Asset Skewness Strategy
Another key topic of discussion in the podcast is cross-asset skewness. Balthus explains that skewness refers to the extent to which an asset's returns deviate from its average value. He discusses the customization of strategies to hedge against downside risk, focusing on reversion signals and the recovery of markets that have experienced significant declines. Balthus also mentions the potential use of forward-looking implied skewness as a sentiment indicator. However, the impact of realized skewness versus forward-looking skewness on the effectiveness of the signal is yet to be explored.
Understanding Multi-Asset Portfolio Construction
Balthus delves into the challenges and considerations involved in constructing multi-asset portfolios. He emphasizes the importance of aligning portfolio design with a specific philosophy, such as risk budgeting and prudent risk management. Balthus highlights the need to compare different signals by making them comparable in units and the significance of features that enhance portfolio design without impacting backtests. He also discusses the strategic choice between signal mixing and strategy mixing, advocating for a combined approach when strategies are of the same nature, either directional or cross-sectional.
Skewness as a Cross-Asset Strategy
Skewness, a measure of return distribution asymmetry, is an important factor across various asset classes such as equities, currencies, interest rates, and commodities. The strategy involves going long on assets with the most negative skewness and shorting those with positive skewness. This cross-sectional relative value strategy has been found to be effective, and the correlations among the asset class portfolios are relatively low, allowing for the creation of a diversified cross-asset skewness portfolio.
Considerations in Skewness Strategy Design
Designing a skewness strategy involves important considerations such as stability of the skewness signal and alpha decay. Skewness measurement can be challenging due to its reliance on outliers. Turnover and alpha decay should be carefully managed to strike a balance between following the signal closely and avoiding excessive trading. Additionally, scaling exposures and portfolio construction choices play a crucial role in strategy design, including whether to scale exposures based on volatility and how to mix different signals and strategies effectively.
In this episode I speak with Nick Baltas, Managing Director at Goldman Sachs and head of cross-asset delta one, commodity, and stocks strategies R&D and Structuring.
There are three major discussion points in this episode. First, we discuss how Nick thinks about using the broad palette of systematic strategies he has at his disposal to solve the problems of asset owners.
Second, we discuss Nick’s research on cross-asset skewness. Less commonly discussed among multi-asset strategies, Nick wrote one of the preeminent papers on the topic and provides considerable insight into the nuance of implementing a skewness strategy.
Finally, Nick shares his thoughts on building multi-strategy portfolios, both in theory as well as with respect to meeting client needs.
I hope you enjoy my conversation with Nick Baltas.
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