Search for high performers
WITH ITS NEED for a diverse range of professional skills and academic expertise, the world of investment banking provides many opportunities for today's graduates.
Bernard Desforges, managing director and Asia-Pacific head of equity derivatives for Societe Generale, entered the field after completing his own studies at a leading French university in 1987.
Since then, he has been with the bank in various capacities and is now on his second stint in Hong Kong, having previously worked here for three years in the mid-1990s.
He recently spoke about his job and what the world of equity derivatives entails.
What are equity derivatives?
The term broadly refers to any investment product with an equity component or which is related to the performance of a share index. This can include warrants, equity-linked notes, funds and what are known as multi-asset-class products. These are specially structured investments and might combine, for example, equities and a foreign exchange element. We handle literally hundreds of different products aimed either at sophisticated high net worth individuals or retail investors.
Who puts these products together?
We have an international team of about 80 front-office staff in Hong Kong, with a similar number elsewhere in Asia. 'Structurers' are experts in creating new products, while other financial engineers specialise in risk modelling to predict how the investment will perform based on a statistical analysis of trends.
What is the next step?
When we feel we have a good 'performance engine', our sales team goes to the marketing department of a potential distributor to pitch the idea. If necessary, there is then some fine-tuning to get the details right. Alternatively, a client will come to us with ideas for a specialised product. For instance, they might want to set up something based on a basket of United States, Japanese and Greater China shares, perhaps offering a guaranteed level of return or an early redemption feature. We will first offer suggestions and then go back and forth to work out a precise solution. The aim is to find a formula that offers better long-term returns for investors.
Which organisation then manages the performance of the product?
That could be either the client or ourselves. It depends who provides the 'wrapper', which is the formal legal framework. Doing that involves getting approval from the SEC or other relevant authorities. It may even extend to marketing and organising appropriate training for the distributor's sales force.
How do you cover the risk?
Once the product is created, all the risk is transferred to the trading books. Managing a fund involves a lot of financial modelling, which takes real mathematical skill and an in-depth knowledge of the equity markets.
Before effecting any transactions, we carefully analyse the possible risk and won't try to make big speculative profits on our trades. The first step is known as 'delta hedging'. It requires calculating the current market value of the portfolio and then looking at the sensitivity of the underlying stocks. To do this, we have parameters to help us decide what to do if the market goes up or down by 1 per cent, or if interest rates move by a certain amount. If these indicate we should sell or buy a particular share, the trading desk then executes an order.
Who are your major clients?
There are two main categories: the first is distributors, such as retail banks or securities houses. We try to offer products which meet the needs and tastes of their customers, while also taking account of the latest trends. The second comprises financial institutions such as pension funds, life insurance companies, private banks and hedge funds.
Each institution has its own benchmarks and liability constraints. It is vital to understand these early on when structuring an investment and deciding how best to manage it.
Private banking business generally targets high net worth individuals. The bigger clients will sometimes ask for tailor-made products when they want to invest a large chunk of money. Also, some of the big US hedge funds are now very interested in Asian investments.
They may even trade from Los Angeles during Asian office hours. Their approach is likely to be completely different from, say, an insurance company. That means we must understand their strategies for trading and arbitrage, and anticipate the assets in which they will want to be long or short.
Which areas are seeing significant growth?
Societe Generale uses Hong Kong as a regional hub and, in the past 12 months, has seen business developing particularly well in [South] Korea and in the Chinese mainland.
Regulatory constraints mean it takes longer to build up trading volumes in China. However, we certainly expect to see much bigger transactions in future as Chinese investors become more interested in leveraged products.
What are the best parts of the job?
The business development aspect is most exciting. It is vital to keep innovating to differentiate ourselves from the competition, and this gives me the chance to get involved in new types of business around the region.
For example, we are now looking at Islamic investment products for markets in Southeast Asia and we may do a big launch for them.
What does a typical day include?
In my current position, there are a lot of management and internal organisation issues to deal with. The key is to keep everything aligned - trading, legal and regulatory aspects, and the client side of the business.
Even so, there is always a need for some troubleshooting, however well you plan things. This might be to fix a line of credit at short notice or to solve an urgent IT problem. I am less involved in overseeing day-to-day risk management - one of my deputies focuses on that - and for regulatory reasons all the back-office settlement functions are run separately.
How do you minimise pressures in the workplace?
The business is complex with many different elements intertwined. It can be stressful, so I make a big effort to create a calm working environment. That begins with hiring people who won't promote internal conflict or be shouting all the time. We have also streamlined the organisation so that we have smoother processes and run seminars to share best practices.
What is needed to get into the equity derivatives field?
Work on a trading floor requires a wide range of skills. Some people have a scientific background, with a degree in physics or maths; others on the sales side may have an MBA or marketing degree.
We also need in-house lawyers, accountants and analysts who are able to interpret the macroeconomic picture. Recruits can be qualified professionals or fresh graduates.