Quantitative-Focused Funds Taking Aim at the Bond Markets

Hedge funds focused on quantitative strategies are taking aim at the bond markets and one of their prime tools is leveraging advanced statistics and machine learning, according to an article in Bloomberg.

Gut instincts used to be one of the key ingredients to success in the bond markets, but that is now been replaced by more quantitative strategies.

“Winning in the bond market used to come down to math skills, gut instinct, and the patience to wade through a hefty prospectus,” the article said. “That was before the quants came. These days the ability to code is one of the hottest skills out there. The multi-trillion dollar market in company debt is getting wired up by systematic players, and firms are having to pay up for the best talent.”

“After years of tiptoeing around systematic styles in debt markets, investors are starting to believe in the promise — ushering in a new world of advanced statistics and robot-learning,” the article added. “About 70% of institutional and 78% of wholesale investors reckon the strategy of dissecting securities by their factors, like value and momentum, are applicable to fixed income, according to a study by Invesco Ltd.”

“There’s been an intensification of interest and willingness to put money on the table in the past 18 months,” said Luke Williams, partner at London-based recruitment firm Lascaux Partners Ltd. “Credit has emerged as a stand-alone business in the systematic investing world.”

Getting More Creative

ETFs are also starting to get more creative and strategic in the bond markets via smart beta fixed income funds. Investors looking to gain broad-based exposure to bonds can look at funds like the ProShares S&P 500 Bond ETF (NYSEArca: SPXB). The fund seeks investment results that track the performance of the S&P 500®/MarketAxess Investment Grade Corporate Bond Index, which consists exclusively of investment-grade bonds issued by companies in the S&P 500.

However, investors can also get the smart beta strategies via fixed-income ETFs. The Invesco Multi-Factor Defensive Core Fixed Income ETF (CBOE: IMFD) and the Invesco Multi-Factor Income ETF (CBOE: IMFI) are recent additions to the issuer’s lineup of multi-factor bond ETFs. Both new ETFs track in-house indexes.

IMFI follows the Invesco Multi-Factor Income Index. That benchmark “is designed to provide multi-factor exposure to fixed income securities in the following weights: 25% in mortgage-backed securities, 25% higher-quality US investment-grade, 25% high yield, and 25% emerging markets debt,” according to Invesco.

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