(Bloomberg) — The growing momentum behind portfolio trading is stirring hopes among quantitative investors it will help them finally conquer an asset class that has resisted their methods for years: corporate bonds.
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These systematic players, who invest based on rules derived from academic research, say they’re increasingly looking to the method of trading large numbers of bonds in one fell swoop to deploy their strategies in credit.
Major firms including Man Numeric, Robeco and Acadian Asset Management are among those talking up the potential of portfolio trading in the $8 trillion market. The approach makes it easier to execute large portfolio adjustments, and creates liquidity in harder-to-trade bonds by bundling them with more popular ones.
“Portfolio trading is a really important stepping stone to continue us on that trajectory away from less efficient voice execution toward more and more electronic execution,” said Paul Kamenski, co-head of credit at Man Numeric, a quant investment arm of Man Group Plc.
Portfolio trades accounted for a record 9% of US corporate bond volume last year, according to data from Tradeweb Markets Inc.
Going by another measure known as dealer-to-client volume, bulk deals currently make up around 25% of investment-grade credit, according to Barclays Plc estimates. Increased adoption by quants is likely to help push it to more than 30% in the next 18 months, reckons Zornitsa Todorova, the firm’s head of thematic fixed income research.
Todorova expects the coming phase of growth to be buoyed by factor investing in credit. That’s a quant approach which bets on things like popular bonds becoming even more popular in short order, or higher credit quality securities performing better than mid-tier credits.
“The next wave would be when factor strategies enter into the market,” said Todorova. In other words, when quants use portfolio trading “to generate alpha, not just really to clean up risk,” she said.
Factor investing has been common in equities for decades now, but has been slow to catch on in corporate debt. Industry specialists informally polled by Bloomberg estimated $10 billion to $40 billion of ETFs dedicated to credit factor investing, a small slice of the $300 billion of actively managed bond ETFs tracked by Bloomberg Intelligence.
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