Bond Quants Are Growing in Negative-Rate World (Bridgewater’s Pure Alpha Fund Loses 2.3% In Nine Months)

Slicing and dicing risk is the name of the game in equities, but not so much in fixed-income … until now.

The surge in negative-yielding debt is making the bond market the next frontier for factor investing, according to a study by Invesco Ltd.

About 70% of institutional and 78% of wholesale investors see the concept of slicing and dicing securities by their characteristics as applicable to fixed income, the survey showed. That’s up from 62% and 57% respectively in 2018. The study polled 241 factor investors responsible for managing more than $25 trillion across the world.

Quant houses have been trying to convert investors to fixed-income factors with the pitch that just as in equities, there are proven systematic sources of long-term returns in bonds. The result of Invesco’s survey is another sign that their push is gathering steam amid concern that the bull market in credit is in jeopardy. More than $13 trillion of debt worldwide has a negative yield, according to data compiled by Bloomberg.

“We are in an environment where yields continue to be very low and the yield curve is very flat and investors are increasingly looking at ways to add value to the portfolio,” Mo Haghbin, chief operating officer at Invesco Investment Solutions, said by phone. “The results show a very high conviction that this is possible, and the allocations are starting to come through as well.”

The survey showed yield (or carry), liquidity and value were the fixed-income factors most commonly cited by investors.

Here are other findings from the survey:

  • Around a third of the respondents have boosted their allocations to factor strategies in fixed income. Still, nearly nine in 10 said the asset class is currently poorly covered by factor offerings.
  • Some 59% of respondents plan to boost their allocations to factor strategies over the next three years.
  • 66%-70% reported factor investing met or exceeded the performance of their traditional active or market-weighted allocations in the year through March 2019.
  • Value was included in 69% of respondents’ portfolios, a drop from 78% in 2018. It was the most common factor, along with momentum. Low volatility followed at 68%.
  • Liquidity and transparency are the main reasons for using exchange-traded products for exposure to factors, according to institutional investors. Meantime, price is a key driver for wholesale investors.

While a large majority of investors now incorporate environmental, social and governance (ESG) goals, they are divided over how these interact with factors. The most common view is that it’s a combination of styles, while about a quarter sees it as an independent factor and another quarter considers it a variation of quality.

Deutsche Bank, as an example of FI factor momentum investment.

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And here is an example of a Nomura FI momentum index.

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Negative interest rates are causing havoc for some hedge funds, like Bridgewater.

Bridgewater’s flagship fund has failed to recover the losses it suffered in August when government bond yields globally plummeted to multiyear lows.

The Pure Alpha fund at Ray Dalio’s $160bn hedge fund group lost 2.3 per cent in the nine months to September, after a particularly difficult August when the firm was wrongfooted by the decline in global interest rates.

Dialo wrong footed? Apparently his “Economic Machine” model failed to predict the onslaught of Central Banks and negative interest rates.

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