More than a decade ago, shortly before the crash, a journalist by the name of Michael Mackenzie wrote an article in the Financial Times titled ‘The rapid rise of the Structurer’ . Almost prophetically, the article drew reference to the tremendous pace in the development of debt trading, and the big contribution made by those who structure sophisticated financial instruments: banking’s new star – the Structurer.
In a world post-2008, where the appetite for synthetic CDOs and the like is far lower, the importance attached to the role of the Structurer sharply declined. Structuring teams were down in headcount, and the position lost much of the prestige it had gained in the early noughties. So much so, apparently, that the succeeding generation of students are sometimes unaware of the many rewards such a career is able to offer.
My motivation for writing this article – besides the shameless self-publication my profession requires – stems from a conversation I had with a Junior Trader around six weeks ago. In his words, his professors at University had failed to educate him on the importance of Structuring, and he had subsequently misspent the first year of his career by pursuing a role in Trading.
After hearing my new friend’s epiphany, I thought it might be helpful to shed some light on the matter, providing students with an insight into the third element of my world – Sales, Trading and Structuring. This article provides an overview of the increasing importance of Structuring, the benefits such a career is able to offer, and an exciting new area that is likely to further contribute to its growth – Alternative Risk Premia.
The Importance of Structuring:
The landscape of the financial markets has changed a great deal in the past decade. The products are arguably less complex, but the context surrounding their application is more complicated than ever. Safeguarding the interests of clients in view of the modern regulatory environment, and ever-changing shifts in international relations and market sentiment, requires a level of comprehension similar to building even the most elaborate mezzanine tranche. In a world still reeling from the biggest crash since the 1930’s, the ability to properly identify and manage risk is key.
Protecting the bank’s interests in this regard is very much a collective effort, with risks such as market risk and credit risk primarily the domain of Trading, but Structurers play a leading role in understanding the needs of their clients and reducing their exposure to risk – a key source of revenue for the modern Investment Bank, to which the Structurer remains crucial.
Contrastingly, the holistic importance of Traders to their area of business seems increasingly less secure. Automation/electronification has severely reduced the number of seats available, and this trend looks set to continue.
A perturbing example of such a shift was revealed in a recent interview with David Solomon, President and COO of Goldman Sachs, who reported that a team which once employed 500 Equity Market Makers, 15-20 years ago, now employs just three . And while this problem was once perceived to be largely confined to Equities and FX, AllianceBernstein has recently proven that Fixed Income is not exempt, with ‘robotic employee’ Abbie the Algorithm handling thousands of Bond trades worth nearly $19bn in the past three months .
Add the recent MiFID II regulations into the mix, which further reduce the significance of human relationships, and it becomes clear that seats in Flow Sales and Trading will become increasingly less plentiful over the course of the next decade. In the zero-sum game that the markets represent, this change could serve to further increase the stock of Structurers.
The Benefits of Structuring:
The most obvious advantage of being a Structurer, I have repeatedly been told, is the duality of the role. Structurers enjoy the highly technical elements they crave, similar to Traders, but also the client contact enjoyed by their counterparts in Sales. In a sense, their role represents the ideal middle ground between these two departments, while also serving as the glue that binds everything together.
Other core benefits include the variety of transactions, asset classes and clients a Structurer may cover at any given time; the creativity they are encouraged to apply when identifying potential problems, and devising and marketing solutions; and the levels of remuneration they receive, which is not dissimilar from counterparts in Sales and Trading, and seems set to rise even further in years to come.
Lastly, there is the breadth of the Structuring world, which is incomparable to other areas of banking. When describing the role of a Structurer to colleagues in the past, I would cite the term as a heading, under which various different roles exist. The role of the Structurer may be akin to Sales, Trading, Quant Analysis, or even Project Management – and may relate to liability management, yield enhancement and/or financing. While it would be misleading to suggest that employees are able to alternate between these roles at will, Structurers will often spend time fulfilling many different functions over the course of their careers.
Alternative Risk Premia:
I have been working with Structurers for around 3 years and have seen a number of trends during this time, where multiple Investment Banks are simultaneously searching for the same profile. One such trend is currently taking place in Alternative Risk Premia, with practically every player in the UK actively recruiting. What’s more, each recruitment drive is in some way linked to an expansion, indicating that the world of Structuring could be approaching a period of sustained growth.
What is Alternative Risk Premia? As recognised by an especially helpful article written by Tom Leake , Head of Systematic Trading Strategies at Goldman Sachs, the industry has unhelpfully developed a wide range of names for what is essentially the same type of investment approach: Alternative Risk Premia, Quantitative Investment Strategies, etc. To keep things simple, I will use what is becoming the most commonly applied term: Alternative Risk Premia (ARP) .
Broadly speaking, ARP is a set of systematic quantitative strategies which serve to better an investor’s risk-return-ratio by reviewing each specific risk in isolation and optimally diversifying their portfolio, utilising such factors as Carry, Momentum and Value. Far from the revolutionary field recruiters often proclaim, ARP is a product of evolution, based on more than 65 years of academic research. With that said, it has been growing in prominence for the last decade and is now causing quite a stir.
Firstly, and most importantly, the profitability of ARP is hard to ignore. According to Tom Leake’s article, the annual return for Goldman Sach’s Alternative Risk Premia Portfolio was 30.15% between 2005-17, compared to the 5.71% return generated from a typical 60/40 Portfolio (60% Equities, 40% Bonds) .
Secondly, there has been a slight shift in market share, which looks set to continue. ARP has traditionally been the domain of Quantitative Hedge Funds, although other institutions are becoming increasingly more disruptive, capable of providing a replicated service boasting more transparency and a lower cost. Anecdotally, I am also able to relay that Hedge Funders seem more receptive to considering Sell-Side roles than ever before in my career.
With the increasing importance of Structuring, the declining number of Flow Salespeople and Traders, and the rise of Alternative Risk Premia, could this mark the second coming of the Structurer? Only time will tell, but it is definitely a career path worth exploring.
- NB: ARP bears subtle differentiators from similar systematic strategies, such as Smart Beta. For more information, please refer to the following link: http://eqderivatives.com/docs/Growing_ARP.pdf
- Ibid, footnote 4, p.10. Sample: 20th Apr 2005 to 31st Aug 2017.