Martin Fridson, an early pioneer of high-yield bond math, likes what he sees here.
While the findings won’t threaten traditional corporate-bond investing anytime soon, “institutional investors who already give mandates to quant managers should be open” to the derivatives-based strategy, says the chief investment officer of Lehmann Livian Fridson Advisors.
Quant Quest
Quants have been tip-toeing into corporate bonds of late, with big-name firms like AQR and BlackRock Inc. applying factors traditionally associated with equities to credit. Connecticut-based AQR last year launched its first fixed-income mutual fund, which has gathered around $100 million in assets.
Meanwhile, the likes of Robeco and JPMorgan Asset Management have waxed lyrical about the potential for factor investing in debt.
But it’s been slow going, as bonds present technical challenges not present in equities, such as varying maturities and lack of reliable prices for thinly traded issues.
Caveats abound, of course. Swaths of money managers are constrained in their use of derivatives and prefer corporate obligations for regulatory or accounting purposes, as Israelov acknowledges. Whether to amass futures and options, or go vanilla naturally depends on context, according to the AQR principal.
“Corporate bonds may be more appropriate in many instances, including for those who want to express a view on individual bonds or desire steady cash flows,’’ he said.
But for programmatic and fundamental traders free of such constraints, Israelov’s paper may provide a glimpse into a quant-driven future for the world of credit.
This article provided by Bloomberg News.