Confidential

Goldm an Sachs
Cross Asset Carry Strategy

Private and Confidential

For Institutional Investors Only
For Discussion Purposes Only
Not for Onward Distribution

References to ‘we’ refer to those of the desk only and does not represent the official view of GS.
Prepared by a Goldman Sachs sales and trading desk, which may have a
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The views or ideas expressed here are those of the desk and/or
author only and are not an “official view” of Goldman Sachs; others
at Goldman Sachs may have opinions or may express views that
are contrary to those herein.
This material is not independent advice and is not a product of
Global Investment Research.
This material is a solicitation of derivatives
business generally, only for the purposes of,
and to the extent it would otherwise be subject
to, CFTC Regulations 1.71 and 23.605.

Q4 2019

Systematic Trading Strategies

SECURITIES DIVISION 1
 Confidential

Goldman Sachs
Cross Asset Carry Strategy

 Introduction

 Index Construction Overview

 Backtested Performance

2
 Confidential

GS Cross Asset Carry Strategy

Introduction

Overview of Carry Strategies

 Equities and bonds are often considered reliable sources of returns, but investors can
benefit by diversifying to other sources of return, such as a market-neutral carry strategy.
 Research has identified carry as the tendency for high-yielding assets of providing higher
returns than lower-yielding assets in normal market conditions.
 An example of a carry strategy would be to borrow money in a low interest rate currency
(e.g. EUR) and invest in a high interest rate currency (e.g. MXN). This strategy could
generate positive returns unless there is an unexpected price change.

Diversified across Asset Classes

 A carry strategy has historically generated positive long-

run returns across a variety of asset classes:
 Fixed Income  FX
 Equity  Credit
 Commodity
 A cross asset carry strategy has historically exhibited:
 Positive returns
 Low correlation versus traditional asset classes

GS Cross Asset Carry Strategy

 The Goldman Sachs Cross Asset Carry strategy is a systematic and rule-based
strategy aiming to harvest the carry risk premium to provide positive performance in
different market scenarios.
 The strategy is constructed to deliver efficient, diversified exposure, reflecting the
interdependencies between the assets, to target enhanced returns.
 The strategy will take a long or short position on 73 different underlying assets.
 The strategy is not live and is subject to GS internal approval.

Source: Goldman Sachs Securities Division, October 31, 2019. For illustrative purposes only.
3
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GS Cross Asset Carry Strategy

Index Construction Overview - Definition of Risk Premium

Carry Risk Premium

 Define exposure to Carry across universe of underliers
 Cooperation: working closely with academia

Carry

 Underlying Asset: broad across asset classes with 73 underliers

Underlying Assets

 Interest Rates: 10y futures across G8

 FX: FX Forward across G10 and EM currencies (22 FX currencies in total)
 Equity: 20 futures on equity indices
 Commodity: 19 commodity futures
 Credit: 4 credit indices (High Yield and Investment Grade)

 Carry metric for each asset class:

 Interest Rates: 10y Yield - 3m Libor + Roll Down
Carry Metric

 FX: Carry implied by 1m forward

 Equity: Carry implied by 12m futures
 Commodity: Carry implied by the first two nearby futures, adjusted for seasonality
 Credit: CDS spread + Roll Down

 Literature:
 Decomposing the Yield Curve – Cochrane, Piazzesi 2008
 Carry – Koijen, Moskowitz, Pedersen, Vrugt 2012
Literature

 Countercyclical currency risk premia – Lustig et al 2010

 Do peso problems explain the returns to the carry trade - Burnside et al 2011
 Carry – Koijen et al 2012
 Good Carry, Bad Carry - Bekaert, Panayotov 2015
 Beyond the Carry Trade, optimal currency portfolio – Barroso et al 2016

Source: Goldman Sachs Securities Division, October 31, 2019. For illustrative purposes only.
4
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GS Cross Asset Carry Strategy

Index Construction Overview - Risk Management

Risk Management
 Translate carry exposure into weights per underlier
 Cooperation: leveraging internal expertise on risk management and
portfolio construction

Maximize the exposure to the Risk Premium, under constraints:

Methodology

Risk Leverage

Target portfolio volatility of 10%, taking into Maximum and minimum weight for each
account both volatility and correlations underlier, and gross weight by asset classes

Risk Premium Metric & Constraints Input Final Optimized Weights

Carry Target Weights

EQ EQ EQ EQ 10y 10y 10y 10y
10y US US Thai Ger Spain EUR GBP CAD US
10y US
EQ US 0.31 0.6 0.49 -0.08 -0.08 -0.15 -0.3
10y CAD 10y CAD
EQ Thai 0.31 0.26 0.26 0.06 -0.02 0.04 0.03
Example1

10y GBP EQ DE 0.6 0.26 0.71 -0.09 -0.13 -0.13 -0.25 10y GBP
EQ Spain 0.49 0.26 0.71 -0.2 -0.21 -0.11 -0.27
10y EUR 10y EUR
10y EUR -0.08 0.06 -0.09 -0.2 0.79 0.67 0.69
EQ Spain 10y GBP -0.08 -0.02 -0.13 -0.21 0.79 0.67 0.69 EQ Spain
10y CAD -0.15 0.04 -0.13 -0.11 0.67 0.67 0.71
EQ DE EQ DE
10y US -0.3 0.03 -0.25 -0.27 0.69 0.69 0.71
EQ Thai EQ Thai

EQ US Vol 6.6% 9.6% 12.3% 14.3% 4.3% 5.3% 4.7% 3.6% EQ US

0% 2% 4% 6% -20% -10% 0% 10% 20%

Literature: Estimating Covariance Matrices - Litterman, Winkelmann 1998, 60 years of portfolio

optimization: practical challenges and current trends – Kolm et al 2014, Cleaning Correlation
Matrices - Bouchaud, Potters 2016

1. Data for illustration purposes only.

Source: Goldman Sachs Securities Division, October 31, 2019. For illustrative purposes only. 5
 Confidential

GS Cross Asset Carry Strategy

Index Construction Overview - Execution

Execution
 Execute exposure in the market
 Cooperation: working closely with Trading desk

 In order to minimize path dependency, market impact, and pin risk, the Goldman Sachs Cross
Asset Carry Strategy is executed using the below features:

 Daily Rebalancing

 Smooth execution over 22 days with a view of limiting turnover and transaction costs

 Centralized Trading capabilities in order to protect information barriers and prevent front
running

Daily Rebalancing Illustration

Day 1 Day 2 … Day

21
Day
22
Day
23
Day
24
Day
25
Day
26

𝐶𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑𝑊𝑒𝑖𝑔ℎ𝑡𝐷1 + 𝐶𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑𝑊𝑒𝑖𝑔ℎ𝑡𝐷2 + ⋯ + 𝐶𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑𝑊𝑒𝑖𝑔ℎ𝑡𝐷22

𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒𝑊𝑒𝑖𝑔ℎ𝑡𝐷22 =
22

Source: Goldman Sachs Securities Division, October 31, 2019. For illustrative purposes only.
6
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GS Cross Asset Carry Strategy

Index Construction Overview - Volatility Target Mechanism

Volatility Target Mechanism

 Targets a volatility of 10%
 Cooperation: working closely with Trading desk

 The exposure to the Cross Asset Carry Strategy is adjusted on a daily basis following a Volatility
Target mechanism, the objective being to maintain the volatility of the basket around the Volatility
Target level of 10%.
 The Volatility Target mechanism decreases the exposure to the Cross Asset Carry Strategy
when the realized volatility is above a 10%, and increases the exposure to the Cross Asset Carry
Strategy, subject to a cap of 125%, when the realized volatility is below 10%.

Portfolio weighted based

on exposure to Carry Volatility Control
Mechanism

Global Cross Asset Target level of 10% The index is in USD,

Futures/Forwards/Indices Every day excess return and
net of transaction costs

GS Cross Asset Carry 10% Volatility Target Strategy – Key Facts

Basket Currency USD

Methodology Volatility Controlled Basket

Volatility Target 10%

Maximum Exposure 125%

Transaction Costs The index is net of transaction costs

Live Date Not live yet

History Available Since 6 January 2000

Return Type Excess Return

Source: Goldman Sachs Securities Division, October 31, 2019. For illustrative purposes only.
7
 Confidential

GS Cross Asset Carry Strategy

Backtested Performance

Backtested Performance

2000

GS Cross Asset Carry Strategy

1800

1600

1400

1200

1000

800

600

400

200

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Full Period Last 10y Last 5y

In USD, Excess Return (6Jan00 – 28Oct19) (31Oct09 – 28Oct19) (31Oct14 – 28Oct19)

Annualized Return 16.3% 17.2% 13.0%

Annualized Volatility 9.1% 8.9% 9.1%

Sharpe Ratio 1.78 1.93 1.44

Max Drawdown -13.7% -13.7% -12.0%

Worst Month -6.2% -6.2% -5.2%

Best Month 8.7% 8.4% 8.4%

GS Securities Division as of October 31, 2019. Data ranging from 6Jan00 to 28Oct19. Performance data is backtested for GS Cross Asset Carry
Strategy. Performance figures are net of transaction costs. Backtesting analysis/simulated results are for illustrative purposes only. GS provides
no assurance or guarantee that the strategy will operate or would have operated in the past in a manner consistent with the above backtesting
analysis. Backtested performance Mai use slightly different data sources, approximation and limited differences in methodology to those 8
prescribed in the strategy disclosure document. Backtested and/or past performance figures are not a reliable indicator of future result
 Confidential

GS Cross Asset Carry Strategy

Backtested Monthly Returns

Backtested Monthly Returns

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Return Vol Sharpe

2000 -0.3% -1.9% -1.2% 1.2% -1.8% 0.7% 1.0% -2.3% -1.4% 0.0% 0.4% 0.7% -4.7% 7.1% Neg.

2001 2.9% 1.8% 0.5% -2.7% 1.5% 1.2% 2.5% 0.0% -1.4% 6.6% -3.0% -0.1% 9.9% 9.3% 1.06

2002 0.1% 3.6% -2.1% 3.1% 0.7% -0.9% 2.6% 5.6% 7.0% 1.1% 2.6% 5.7% 32.6% 9.1% 3.60

2003 -0.8% 3.6% 1.7% 8.7% 2.7% -1.1% -3.5% -1.1% 3.1% -1.7% 0.3% 1.0% 13.3% 9.4% 1.42

2004 4.5% 6.3% -1.9% -3.3% -1.8% 0.3% 4.9% 3.0% 4.7% 0.3% 1.7% 4.0% 24.7% 9.4% 2.62

2005 5.9% -1.2% 1.2% 4.7% 3.6% 5.3% -3.3% 2.6% 4.3% -0.7% 5.7% 0.0% 31.4% 8.4% 3.74

2006 0.8% 3.0% -5.1% 1.1% -0.9% -0.3% 3.6% 3.5% 0.6% 1.5% -3.6% 5.4% 9.4% 9.9% 0.95

2007 0.4% -0.4% 2.1% 1.2% -0.5% 3.3% -0.3% -4.6% -1.5% 0.5% -1.4% 3.3% 1.9% 11.0% 0.17

2008 0.7% 0.5% 1.6% 1.4% 2.8% 4.1% 5.1% -0.1% -4.2% -4.9% 4.4% 3.2% 15.0% 11.1% 1.35

2009 0.0% 1.8% 1.5% 4.1% -0.4% 2.8% 3.7% 2.4% 3.0% 1.2% 4.5% -0.3% 27.2% 7.7% 3.53

2010 3.4% 0.8% 2.8% 3.4% -0.2% 2.2% 0.8% 6.1% 3.1% 1.0% -2.8% 1.2% 23.9% 9.8% 2.43

2011 -1.3% 3.5% -1.7% 2.6% 3.4% 1.9% 2.3% -3.5% -1.8% 3.4% -1.8% 4.2% 11.3% 9.1% 1.25

2012 6.9% 3.4% 0.6% -1.4% -3.2% 2.4% 4.2% 3.1% 3.7% 1.8% 4.1% 1.1% 29.7% 7.4% 4.01

2013 4.3% 5.7% 2.7% 7.1% -6.2% -3.2% 0.4% -2.1% 1.8% 3.5% -0.3% -2.1% 11.4% 9.1% 1.26

2014 1.6% 1.6% 2.8% 1.1% 6.4% 2.4% 0.6% 5.9% -1.4% 4.2% 4.0% 0.9% 34.4% 9.0% 3.84

2015 3.9% 1.2% 0.5% -2.1% -0.8% -4.3% 3.0% -3.2% -0.3% 3.6% 2.5% 0.7% 4.2% 8.3% 0.51

2016 5.2% 3.9% 2.7% -1.1% -0.3% 8.4% 4.4% -1.6% 0.7% 0.1% -3.9% 2.9% 22.6% 9.4% 2.41

2017 -2.7% 5.3% 0.6% 1.9% 1.7% -3.2% -0.1% 4.0% -0.4% 4.2% 0.0% -0.9% 10.7% 8.3% 1.30

2018 -4.3% -1.8% 3.5% 1.1% -4.9% 1.4% 2.9% -5.2% 2.7% -0.4% 2.9% -3.0% -5.5% 10.3% Neg.

2019 7.7% 2.6% 5.5% 3.7% -3.1% 6.2% 4.5% -0.7% 1.4% 0.2% 31.3% 8.2% 4.77

GS Securities Division as of October 31, 2019. Data ranging from 6Jan00 to 28Oct19. Performance data is backtested for GS Cross Asset Carry
Strategy. Performance figures are net of transaction costs. Backtesting analysis/simulated results are for illustrative purposes only. GS provides
no assurance or guarantee that the strategy will operate or would have operated in the past in a manner consistent with the above backtesting
analysis. Backtested performance Mai use slightly different data sources, approximation and limited differences in methodology to those 9
prescribed in the strategy disclosure document. Backtested and/or past performance figures are not a reliable indicator of future result
 Confidential

GS Cross Asset Carry Strategy

Backtested Correlation & Weights

Backtested 12m Correlation

100% 100% 12m correlation vs. US Fixed Income

12m correlation vs. US Equity
75% 75%

50% 50%

25% 25%

0% 0%

(25)% (25)%

(50)% (50)%

(75)% (75)%
12m Rolling Correlation Average = 7.4% 12m Rolling Correlation Average = 32.5%
(100)% +/- 1 Standard Deviation Current = 45.8% (100)% +/- 1 Standard Deviation Current = -26.5%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

100% 100%
12m correlation vs. Hedge Funds 12m correlation vs. Commodities
75% 75%

50% 50%

25% 25%

0% 0%

(25)% (25)%

(50)% (50)%

(75)% (75)%
12m Rolling Correlation Average = 16.3% 12m Rolling Correlation Average = 0.0%
(100)% +/- 1 Standard Deviation Current = 53.7% (100)% +/- 1 Standard Deviation Current = 39.4%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Backtested Risk Allocation

The chart below displays the positioning over time, with average risk allocation (average per year) to each asset classes. The
portfolio has had diversified risk allocation across asset classes.

100%

Equity

80%

Fixed Income

60%

Credit

40%

Commodity

20%

FX

0%
2011
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2012

2013

2014

2015

2016

2017

2018

2019

Goldman Sachs Securities Division, as of October 31, 2019. Data ranging from 6Jan00 to 28Oct19. Correlation is calculated on 5b returns.
Backtesting analysis/simulated results are for illustrative purposes only. GS provides no assurance or guarantee that the strategy will operate or
would have operated in the past in a manner consistent with the above backtesting analysis. Backtested and/or past performance figures are
not a reliable indicator of future results. US Equity: S&P 500 TR (SPXT) is a live index published by S&P Dow Jones Indices. US Fixed Income:
Bloomberg Barclays US Treasury 7-10y (LT09TRUU) is a live index published by Bloomberg. Commodities: Bloomberg Commodity Index
(BCOM) is a live index published by Bloomberg. Hedge Funds: HFRX Global Hedge Fund index (HFRXGL) is a live index published by Hedge 10
Fund Research, Inc. The indices are made Excess Return by subtracting Fed Funds to make it comparable.
 Confidential

Appendix
Appendix

11
 Confidential

Appendix
Volatility Target Mechanism

 The Volatility Target Mechanism decreases the exposure to the Cross Asset Carry Strategy when the realized
volatility is above a 10%, and increases the exposure to the Cross Asset Carry Strategy, subject to a cap of
125%, when the realized volatility is below 10%*.

Simulated Volatility and Exposure to the Cross Asset Carry Strategy

Realized Volatility of the Cross
Realised Asset Carry
Performance AssetStrategy
Exposure of the 12% Volatility
Volatility Controlled
Controlled IndexIndex
to thetoCross
the Performance
Asset Carry Asset
Strategy
Cap exposure

Low Volatility, This graph does not show

High Exposure the realized performance,
Increasing this is a simulated track for
Exposure as illustrative purpose only.
Decreasing
volatility
Exposure as
decreases
volatility increases

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Stylized illustration of how the Volatility Target Mechanism Works

Low Vol + Up Market High Vol + Up Market

Volatility Target  
is similar to Long
Upside Volatility Target is Reduced
Only
Participation Defensive upside
(with potential
participation
leverage)

Low Vol + Down Market High Vol + Down Market

Volatility Target  No 
is similar to Long additional
Volatility Target is
Only protection Downside
(with potential  Potential leverage
Defensive
protection
leverage) on downside

*The exposure is computed as the ratio of the predefined target volatility of 10% versus the realized volatility, subject to a cap of 125%.
Source: Goldman Sachs Securities Division as of October 31, 2019. For illustration purposes only. Please refer to official strategy
documentation for exact calculations of the Volatility Target Strategy. Goldman Sachs does not provide tax, accounting, regulatory or legal
advice to our clients, and all clients are advised to consult with their own advisers regarding any potential investment/ transaction. This material 12
is for discussion purposes only, and does not purport to contain a comprehensive analysis of the risk/rewards of any idea or strategy
 Confidential

Appendix
Disclaimer

13
 Confidential

Disclaimer

This message has been prepared by personnel in the Securities Division of one or more affiliates of The Goldman Sachs Group, Inc.
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14
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15
 Confidential
Systematic Trading Strategies
SECURITIES DIVISION

Confidential