For all his years preaching to a world of finance where quant investing is a religion, Patrick Houweling inspired few believers. Suddenly, he’s got a flock.
Hedge funds, investment banks and sovereign wealth funds are racing to discover the next big thing in fixed income. In so doing, they’re heeding the counsel of the soft-spoken Robeco manager whose 2014 paper is a touchstone for quants channeling the boom in factor investing that’s taken over stocks.
“It used to be that we’d have to spend most of our time in meetings with prospective clients explaining what fixed-income factor investing is,” said Houweling, whose team oversees around 4 billion euros ($4.5 billion) in such strategies. “Now we don’t need to explain. People just want to know how they can use it.”
By carving up corporate bonds into behavioral traits such as value and momentum in the search for alpha, these math wizards are hoping to disrupt the established giants of the trillion-dollar credit market.
It also offers the prospect of redemption for quants riddled with outflows and existential angst as they underperform in the stock boom. A comedown for AQR Capital Management -- co-founder Cliff Asness has called recent performance “crappy” -- and peers has them scrambling for fresh ways to win over Wall Street.
Houweling at Robeco Institutional Asset Management BV is an unlikely figure to start a revolution, but the thoughts he set out in his 1998 masters thesis as a student of econometrics are taking hold in the real world. Until relatively recently he was one of a small handful shepherding a way to bet on fixed-income factors. Now he criss-crosses the world, extolling the virtues of the high-octane strategy to Australian pension funds and sovereign wealth fund managers in the Middle East and Asia.
Among recent moves in Europe, Northern Trust Asset Management is raising money for a fund based on credit factors, while a group of ex-BlueBay Asset Management executives are starting a London firm centered on the strategy.
Established players include AQR which launched a mutual fund in April 2018 using the same theoretical underpinning in their equity offerings. BlackRock Inc. and Invesco run passive products riding the investing style with more than $500 million in assets combined.
Unlike in stocks, where quant over-crowding may be exhausting the potential for alpha, it’s a nascent industry. On a recent marketing trip to Europe, Michael Hunstad, director of quantitative strategies at Chicago-based Northern Trust, likened the trajectory to the early days of equities.
“It’s an entirely different way of thinking about the world,” he said. “That’s where we were in the equity markets 10 years ago.”