From a high-level perspective, there is a clear trend of increasing adoption of quantitative investment strategies (QIS) among Nordic institutional investors, either through the internal development of such strategies and through outsourcing. Edvin Petersson, Head of the Institutional Client Group Northern Europe at Deutsche Bank, among other roles, has observed a shift in how institutions embrace QIS – moving toward more granular and purpose-driven implementations.
The adoption of quantitative strategies by Nordic institutional investors has not followed a straight path, but rather experienced “a bit of an ebb and flow,” according to Petersson, who has over 20 years of experience working with investors in the region. At Deutsche Bank, Petersson recalls that the business of offering QIS solutions to Nordic clients began around 2012–2013, initially through long/short equity implementations. Over time, the focus expanded into cross-asset risk premia strategies, which gained traction and evolved to becoming standalone allocations in their own right.
From Broad Allocations to More Granular, Purpose-Driven Strategies
“It was initially driven largely by the disappointing equity returns around 2008. That was the catalyst,” recalls Petersson. “Investors held broadly diversified equity portfolios with multiple managers, many of whom were marketed as alpha generators. But when the crisis hit, correlations went to one.” In response, investors began seeking exposure to long/short equity strategies in pursuit of uncorrelated returns. “That evolved into the long/short cross-asset space,” continues Petersson. “But the motivation remained the search for uncorrelated return streams.” According to Petersson, this type of implementation remained in strong demand for several years, up until around 2018.
However, Petersson notes that the strong investor appetite for alternative risk premia strategies led some institutions to allocate to portfolios containing a large number of strategies, which caused challenges with due diligence and monitoring. As performance across the alternative risk premia space proved underwhelming over several years, allocations began to wane. “A key reason was the prolonged underperformance of value, which was a core component in many of these portfolios,” he explains. This, combined with what became known as the ‘quant winter,’ led to a widespread decline in assets under management across these strategies.
“Investors are increasingly cherry-picking individual strategies they find most compelling from each provider. It’s a healthy outcome. Many providers offer a broad and solid suite of strategies, but naturally, there are areas where some stand out more than others.”
Today, both investor interest and assets under management are rebuilding in a more “granular fashion,” says Petersson. Instead of allocating to broad portfolios comprising 50 to 70 strategies from multiple providers, “investors are increasingly cherry-picking individual strategies they find most compelling from each provider.” Petersson views this as a very positive development: “It’s a healthy outcome. Many providers offer a broad and solid suite of strategies, but naturally, there are areas where some stand out more than others.” More importantly, he adds, investors are now approaching allocations with greater intent, focusing on the specific rationale and portfolio role of each chosen strategy.
The reasons for implementing these strategies have become more diverse, according to Petersson. “Whereas it was initially very much about seeking absolute, uncorrelated returns, the implementation scope has broadened significantly.” Today, investors might turn to quantitative strategies for a range of purposes – whether to replace equity put options with something less punitive in terms of carry, to pursue return-seeking objectives, or as substitutes for traditional hedge fund allocations. “There’s now a broader set of motivations behind these investments, but they tend to be more clearly defined,” he continues. “Investors have a clearer idea of why they want to use these strategies and which specific strategies they want to cherry-pick from different providers.”
Expanding Scope and Challenges of Systematic Fixed Income Strategies
While systematic investing has traditionally been more conducive to equity markets and less so to fixed income, Petersson observes growing adoption and interest in systematic fixed-income strategies in various forms. “The equity space is quite well explored, so it’s natural that attention is shifting toward fixed income,” he says. He adds that the current macro environment is also playing a role: “We now have more volatility and a normalization of the yield curve. Compare that to the pre-pandemic environment – rates were low, often negative, and the fixed-income landscape made it harder to identify compelling strategies.” In contrast, today’s more normalized interest rate environment is offering new opportunities.
“The equity space is quite well explored, so it’s natural that attention is shifting toward fixed income. We now have more volatility and a normalization of the yield curve.”
One particular challenge with systematic strategies in the fixed income space is managing transaction costs. “Deutsche Bank has a strong heritage in fixed income – it’s in our DNA – so we’ve been able to address the issue of transaction costs very effectively,” says Petersson. “This is particularly important because fixed-income strategies often involve higher cost per unit of underlying volatility, compared to, say, equity or FX strategies, where transaction costs are almost negligible.” In fixed income, by contrast, costs can quickly erode excess returns if not managed properly. “A strategy that looks compelling on paper may turn out to be far less attractive once realistic trading costs are factored in.”
Building vs. Outsourcing Systematic Strategies: Operational Realities
The gradual adoption of systematic strategies is, according to Petersson, “part of the broader passivization of investments.” Rather than relying heavily on high-cost, alpha-seeking external managers in the equity space, investors are increasingly questioning the value-add. “When you look at the overall performance, many of these managers end up delivering something quite close to beta – but at a much higher cost,” says Petersson. As a result, investors are becoming more inclined to secure low-cost beta exposure and selectively add alpha-generating components on top. “In the past year or so, we’ve seen institutions replace long-only mandates with indexed exposures, while seeking more purpose-driven, often systematic, strategies to complement them.”
“In the past year or so, we’ve seen institutions replace long-only mandates with indexed exposures, while seeking more purpose-driven, often systematic, strategies to complement them.”
Some larger allocators with greater resources have also developed quantitative investment strategies in-house. According to Petersson, the decision to build internally or outsource “depends very much on the size of the investment teams.” He emphasizes that internally managed and external systematic strategies “can and often do coexist,” with some investors choosing to implement certain strategies themselves while sourcing others from banks or external managers. “If you’re a large fund with, say, 100 people in the investment department, you can afford to self-implement a significant portion of simpler strategies,” Petersson explains. “But for smaller teams or those with operational constraints, the challenge is much greater.”
As investment banks’ platforms have become increasingly efficient over time, “pricing has consequently become tighter,” says Petersson. He adds that clients are now more willing to outsource these strategies to banks because many of them are resource-intensive, not only in terms of the IT infrastructure required but also in execution and operational complexity. “What used to be a relatively esoteric solution for a very specific purpose has evolved into a much more broadly accepted product,” concludes Petersson. “These strategies are now viewed as ready-made building blocks you can seamlessly plug into your portfolio, allowing investors to avoid the operational hassle while fulfilling specific tasks in the portfolio.”
