Asia structured products house of the year: Societe Generale

The bank’s foreign exchange hedged indexes for equity-linked products, …. The Minsheng Macro 1 index consists of stock and bond futures in …

The Asian structured products market offer a timely example of Warren Buffet’s observation: “It’s only when the tide goes out that you learn who’s been swimming naked.”

The past year has seen Asian exotics desks lose several hundred million dollars, as equity-linked product portfolios blew up in the fourth quarter and dealers struggled to cope with market swings. Amid all this, Societe Generale has managed to not just hold its own but also come up with ideas that helped customers switch products in line with the market tide and create solutions that reduced risk.

The bank’s foreign exchange hedged indexes for equity-linked products, geometric dispersion notes, quantitative index solutions for China structured products and a restructured rates offering are some of the standout innovations that have benefitted clients and were quickly aped by competitors. These solutions are a testament to the bank’s product innovation capabilities and enhanced risk recycling that are complemented by strict product governance, increased digital trading, automation and expansion into markets such as Malaysia and Thailand.

The French bank, which is well known for its structured equity investment solutions, has built a cross-asset focus and expanded its offering to cover rates, credit and foreign exchange over the past two years. These products have contributed to an 11% increase in the value of traded notionals in the last 12 months.

“Today, we offer a very diverse offering to our clientele,” says Thomas Decouvelaere, head of structuring for Asia-Pacific at Societe Generale. “We have pioneered successful products across not just equities but fixed income too. We now show our clients 10 structures every day versus one or two a few years ago.”

All this has been made possible by building an onshore sales presence in markets from Australia to Malaysia, customising solutions for local markets and automation. The number of automated quotes climbed 48% last year and the number of automated trades rose 53%. The bank handled 35,000 requests for quotation on average every day last year, up from 20,000 the previous year.

Automated trades made up almost a third of the bank’s structured product volumes for the private banking business in Hong Kong and Singapore last year and is expected to increase to half with the next two years, says Decouvelaere.

A key to its success in Asia has been Societe Generale’s ability to constantly offer small tweaks to structures and payoffs, regularly come up with pioneering solutions.

Monitoring product lifecycle

The advisory setup of the bank allows it to monitor the product or solution from inception to maturity and adjust in line with changing market conditions.

For example back in 2016–17, the large insurers and pension fund clients were investing in long-term range accrual products, with 15-year tenors. These products offered investors a way to gain from the steepening US dollar rate curve.

Last year, those clients began to be concerned by the flattening of the rate curve and asked Societe Generale to come up with cross-asset solutions to mitigate the risk that could negatively impact the range accrual coupons.

The bank immediately responded by proposing to lengthen the product maturity by one or two years giving room to add additional bespoke exposures such as credit risk. While these would reduce the maximum possible coupons level, Societe Generale could propose safer range accrual barriers, even negative barriers.

“Our solution came to the fore when the curve actually inverted later,” says Decouvelaere “We are probably the only bank capable of mixing multiple exposures with very long-term and complex structures. Our flexibility has been helped by our increased local presence in markets.”

FX hedged index

Another product that speaks for Societe Generale’s structuring capabilities is a foreign exchange hedged index that mitigates the quanto risk for clients and dealers.

Societe Generale launched the index in December and offered it to wealthy investors through Hana Financial Investments, a South Korean securities house. The product has attracted about $1 billion in investment so far, the bank says.

The autocallable securities, which pay investors a competitive coupon linked to the worst-performing benchmark in the basket are denominated in won, but the options and futures that dealers use to hedge the issuance are denominated in the home currency of the index such as the US dollar for S&P 500 or Hong Kong dollars for HSCEI.

This leaves banks with forex risk to manage. Dealers that issue autocallables are short the foreign currency/won vega and gamma – the exposure to movements in volatility, and the rate of change of sensitivity to moves in the underlying, respectively – as they do not want the exchange rate to move. Dealers struggled to hedge this risk in HSCEI-linked Korean autocallables during the 2015 China Black Monday episode.

To take on this risk, dealers charge investors for smoothing currency gyrations, which is referred to as the quanto adjustment, and this is about 1% of the upfront value of a typical autocall contract. But by using forex-hedged indexes instead, dealers can offer a 0.5% to 1% increase in coupon per annum, or a 20% boost in yield.

The hedged index works by investing in one of the underlying benchmarks and adds a forex forward to it, which hedges the currency risk of the benchmark versus won. The index is rehedged on a monthly basis.

The forex forward is put in place monthly and the notional on which the forex forward is based is reset at the start of each month. As a result, the index level is hedged at the start of the month, but the additional intra-month performance will not be.

This means the gains or losses on the index during the month can be affected by currency moves until the position is rehedged at the end of the period. The impact though will be minor. For example, if the index went from $100 to $105, but the forex rate fell 2%, there would only be a 10 cent loss in value.

QIS solutions

Another index that Societe Generale introduced was a quant index-linked wealth management product in partnership with China Minsheng Bank.

The Minsheng Macro 1 index was launched by CMBC’s asset management unit in partnership with Societe Generale last December and has attracted $1 billion so far.

The multi-asset index uses a quantitative strategy to determine signals for when to trade. It is said to be one of the first so-called signal indexes underpinning a non-guaranteed wealth management product in China. A decline in lending rates has led Chinese investors to explore global assets and alternative structures to enhance yield. The product has returned 16.55% since inception.

The Minsheng Macro 1 index consists of stock and bond futures in developed markets including the US, Japan, Germany and Australia, as well as commodities. Societe Generale provides hedging services on the strategy. Each month, the French bank receives the global asset allocation instructions from CMBC’s asset management unit, and then hedges the options with relevant instruments. The volatility of the index is targeted at 5%, the French bank says.

Most of the investment in the product is linked to a fixed income portfolio – typically Chinese government or supranational bonds – that would generate a fixed payout of 4% a year. CMBC will retain a 1% coupon and use the other 3% to buy a call option on the index with Societe Generale. The maximum loss in the event of a default by Societe Generale is the premium spent on the option – 3% – as there is a 1% minimum coupon.

Societe Generale focuses on volatility control to achieve stable realised volatility for the index regardless of the investment manager’s decision to allocate to equity or fixed income, or a mix of bot. It recycles the volatility exposure through its trading book and other liquid derivatives such as listed or over-the-counter options.

The bank also thought out of the box to come up with geometric dispersion strategies as part of its risk recycling efforts. Given the bulk of the business in Asia is based on the worst-performing index, the business would be exposed to covariance risk. Societe Generale typically unloads Asian risks globally but has seen pick-ups in the interests of hedge funds in such products, says Decouvelaere.

Societe Generale proposed stocks as an alternative universe for geometric dispersion. A hedge fund manager says while he was keen on the geometric dispersion idea, he was worried about the risk of bankruptcy on specific equity stock.

The French bank came up with a solution wherein it managed to cancel the bankruptcy risk in the event of default of one equity in a basket of dispersion. When a stock drops below a certain percentage of the initial price then it is removed from the dispersion basket, thus protecting the client.

Societe Generale’s solution was not “only innovative but immediately solved the problem and this made the trade very appealing”, the hedge fund says.

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Bitcoin Hit Record Inverse Correlation to Chinese Yuan in Past Week

Bitcoin price has seen a record inverse correlation with the Chinese yuan (CNY) this week, according to an analysis from Bloomberg on Sept. 6.

Bitcoin price has seen a record inverse correlation with the Chinese yuan (CNY) this week, according to an analysis from Bloomberg on Sept. 6. This suggests that investors are using the digital currency as a hedge against the yuan’s falling value.

Bitcoin/CNY correlation chart

Bitcoin/CNY correlation chart. Source: Bloomberg

Weakening yuan causes price premium on bitcoin in China

Further evidence that Bitcoin is being used as a hedge in China can be seen in the higher prices being paid in local exchanges when the yuan fell. According to London School of Economics researcher, Dr. Garrick Hileman:

“You can see it in the premium price paid sometimes for Bitcoin in exchanges like Huobi that primarily cater to Chinese.”

Factors such as the ongoing trade war with the United States and central bank monetary easing policy are contributing to a weaker CNY/USD. However, a court ruling in July that Bitcoin was a protected virtual asset and legal in China, has added to its lure as a hedge.

In addition, businesses in Hong Kong are also increasingly adopting Bitcoin as a form of protest.

Inverse correlation has increased as trade relations have deteriorated

The correlation first became more evident in April and May, amid rising tensions in the trade war between China and the U.S. The current magnitude of the inverse movement is similar to that of gold against Brent crude-oil futures. Gold prices also tend to rise when crude-oil futures are dropping.

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CoinFLEX Secures Over $10M in Funding

The round was co-led by Polychain Capital and NGC Ventures, with participation from Divergence Digital Currency and Bitcoin Cash advocate and …

coinflexCoinFLEX, a Seychelles-based physically delivered crypto futures exchange, secured over $10m in funding.

The round was co-led by Polychain Capital and NGC Ventures, with participation from Divergence Digital Currency and Bitcoin Cash advocate and angel investor Roger Ver.

Led by Mark Lamb, CEO, CoinFLEX is a physically delivered crypto futures exchange developed to solve the issues with cash-settled crypto futures contracts and provide high leverage ways to hedge crypto exposure with zero index or settlement manipulation risk. The company is focused on the Asian retail trader market as well as the market for commercial hedging, including mining firms, OTC trading desks and global proprietary trading firms.

CoinFLEX has a trading volume of over $150,000,000 USD.

In order to support this growth and further accelerate liquidity, the company has also announced the launch of its Market Making Program, an initiative aimed at professional proprietary trading firms, hedge funds and institutions within the cryptocurrency industry, to participate in the platform while meeting predetermined monthly objectives.

FinSMEs

26/08/2019

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Jim Cramer: The World of Short Squeezes

What does it mean when you see the stock of Target (TGT) up 19% or a Lowe’s (LOW) up 10%? How can the stock of Nvidia (NVDA) be up another …

What does it mean when you see the stock of Target (TGT) up 19% or a Lowe’s (LOW) up 10%? How can the stock of Nvidia (NVDA) be up another five points after moving up relentlessly last week? Does it signal that there are major changes afoot? That there’s a sudden reorganization or a big positive in the macro world that’s descending right to the micro, or the actual stock?

No, not at all. These moves, while they would have been pronounced no matter what because of a series of upside earnings surprises and better than expected forecasts, are really the results of short squeezes and for those of you not aware of this world, it’s time you learned lest you think that there’s something magical going on.

First, understand that at all times there are hedge funds making gigantic bets on individual companies. They do so because they are paid to make money in good or bad tapes. They can’t just show a small beat of the S&P 500 because they often get paid as much as 2% for giving it to them and 20% of your gains. Two and 20 is the rule.

What many a hedge fund does these days is try to merge the top down with the bottoms up and throw in some reporting, largely anecdotal, and some supposition. Plus you always are supposed to have the wind at your back: in this market many hedge funds believe we are going to have a recession so retail is particularly vulnerable.

So,, let’s take the cases of Lowe’s and Home Depot (HD) , its bitter opponent. There were hedge fund managers out there who decided to take a paired position: long Home Depot short Lowe’s. It made sense. Just like if you are at the track, you look at the last performance and for Lowe’s is was wanting. If you were on the very good call yesterday from Home Depot no one could fault you for suspecting that Home Depot took share from Lowe’s.

So it made plenty of sense. When the news came out this morning about the strength of Lowe’s – across ever aisle and in every geography – the trade was blown. When you are a trader you know that discipline trumps conviction. When you have a busted trade you have to go in and cover at any price. That’s why you could see the stock up $10 in the pre-market. That’s just disciplined short-sellers covering.

Target has a different set of circumstances. There was a two-fold case against Target: 1, That it can’t compete with Amazon (AMZN) and Walmart (WMT) because it doesn’t have the scale, and 2., It would be hurt by the tariffs – be tarrafied – because it has so much imported from China materials.

As a denizen of good Targets, I had a suspicion that it would be a terrific quarter which is why I included it in WATCH – Walmart, Amazon, Target, Costco (COST) and Home Depot. The new stores and the small formats are fantastic, as is the Shipt same day delivery system. Those were enough to blow away those concerns were way wrong. Target’s stock was a totally wayward short that was dead on arrival, so the covering began way before the open.

Oh, and the macro people look pretty foolish now because the wind seems to be of the tail not a head variety.

Finally, Nvidia. Here’s a company that had a series of subpar quarters with products that were supposed to be either too early for their time – Ray tracing – or in the thick of the data center which is regarded as weakening. But when the company reported you heard those concerns ameliorated. Moreover, its artificial intelligence and inference chips are the hottest out there. A real good short at $280 becomes a nightmare at $140, $160 and now $170, and it’s not done going higher.

Remember, shorts are great fuel for exaggerated moves. I don’t like to bet against shorts – that’s a fool’s game as they often know more than you. But when a short is crowded and wrong you can make the biggest money possible, save for a takeover, and that’s what you are getting with the stocks of Lowe’s, Target and Nvidia.

(Nvidia, Home Depot and Amazon are holdings in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells NVDA, HD or AMZN? Learn more now.)

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Treasurys are ‘frickin’ expensive,’ says co-founder of world’s second biggest hedge fund

In a blogpost on Tuesday, the co-founder of quantitative investing hedge fund AQR Capital Management, assessed the attractiveness of the U.S. …

Billionaire hedge fund manager Clifford Asness added his voice to the crowd of investors balking at the depths U.S. Treasury yields have now plumbed.

In a blogpost on Tuesday, the co-founder of quantitative investing hedge fund AQR Capital Management, assessed the attractiveness of the U.S. 10-year Treasury note by looking at its inflation-adjusted yield and the yield curve’s slope as measured by the yield difference between the 3-month bill and the 10-year note.

Asness found that when he averaged the two measures, both used to gauge the valuations of the long-term bond, this composite gauge indicated the 10-year yield was at its most expensive level since some months in the late 1970s.

“The bottom line is, as measured by real bond yield, U.S. Treasury bonds are really frickin’ expensive,” said Asness. “But, measured by the average of these two simple variables, they are 60+ years just about record-low frickin’ expensive,”

AQR Capital Management

See: Bonds meet these four criteria for being in a bubble

The 10-year Treasury note yield TMUBMUSD10Y, -1.26% traded at 1.688% on Friday, around its lowest levels since October 2016. The benchmark bond yield has given up around a single percentage point since the start of the year.

But the hedge fund manager doesn’t see the current level of bonds yields as an excuse to time the market and short Treasurys, but rather to illustrate the simply eye-watering prices U.S. government debt is now fetching.

“When something as important as the U.S. bond yield hits historical extremes, it’s worth at least a discussion, though certainly not an automatic huge short,” said Asness.

He points out Japanese bonds were expensive by several metrics for a long time. Yet shorting Japanese government debt in expectation that their ultra-low yields were unlikely to last has ended up as a “widow-maker” trade for hedge funds and other speculators willing to try their luck.

In addition, U.S. Treasury yields are “high versus some major parts of the world attempting to discover how negative a government guaranteed bond can yield before savers build private fortresses to store cash,” said Asness.