Systematic Credit Can Shrink Drawdowns and Help Investors Hit the ‘Liquidity Jackpot’

Interest in the quant strategies is heating up but it’s still early days, according to AllianceBernstein.

Bigstock Photo

Bigstock Photo

Systematic fixed income can help investors mitigate the impact of market drawdowns and generate returns that are uncorrelated with actively managed bond strategies.

That’s the thesis laid out in a new report from AllianceBernstein. The manager argues that systematic fixed income strategies, which have been helped along by advances in data science and trading analysis, are finally ready for prime time.

Since 2004, AllianceBernstein has been using quantitative tools to help it invest in fixed income, said Scott DiMaggio, co-head of fixed income. Over that time, computers have become more powerful, while more granular data on fixed-income markets has beome available and can be captured. Today, the asset manager collects three and half million fixed income data points daily — including bids, asks, and transactions — and its analysis is proving fruitful in showing the benefits of systematic credit.

Like all fixed income investors, AllianceBernstein is constantly working to collect more data on the market — quickly enough and in a form that they can use — from the various broker-dealers who don’t aways deal in the same liquidity pools. But systematic credit investors think they have an advantage over the traditional or fundamental managers trying to do the same.

AllianceBernstein simulated the rolling three- and five-year returns of U.S. investment grade and U.S. high-yield systematic fixed income portfolios from January 2010 through December 2022. The U.S. investment grade strategy returned 5 percent net of fees, beating the 3.5 percent return of the Bloomberg US Corporate Fixed Income Index. The high-yield strategy returned 7.2 percent, also beating the 5.8 percent delivered by the Bloomberg US Corporate High Yield Index. But the systematic strategies had the same volatility as their respective benchmarks.


Together, the returns and the volatility “indicate strong potential for systematic fixed-income strategies to generate consistent alpha and to enhance Sharpe ratios,” according to the AllianceBernstein report.

But they aren’t simply riding the same wave as their index because well-designed systematic fixed income strategies, with their diversified factor exposures, have a lower probability of large drawdowns from single-factor events compared to traditional active strategies, the report says.

Better Sharpe ratios and diversified exposure enable systematic investors to focus less on beta, or what the overall market generates, and more on alpha generation, DiMaggio said.

Liquidity is the top issue influencing a fixed-income manager’s ability to outperform,” the report says. As a result, AllianceBernstein is applying its quantitative analysis to the wealth of data it collects in hopes of making markets more predictive and to “improve our chance of hitting that liquidity jackpot,” DiMaggio said.

Systematic fixed income is capable of generating new, actionable trade and portfolio construction ideas, he added.

Interest in systematic fixed income has been heating up in recent years and DiMaggio expects these strategies to be ultimately as prevalent at quant equity. But it’s still early days. “I’m not even sure that people are looking at it as a mainstream way to manage money in fixed income at this point.”