FT: quant funds home in on the bond market

Bond markets are slowly but surely becoming more reliant on machines. At the moment only smaller trades can be automated, with big-ticket or more bespoke deals still arranged by messages and phone calls. But some predict that we are only at the early stages of a bond market revolution.

Man Numeric launched a systematic bond platform late last year, initially focused on US junk bonds but with plans to expand it into investment-grade corporate debt over the next year. One area the hedge fund has found fruitful is “alternative data”, non-traditional information such as credit card purchases, trade receipts and shipping data.

This can help to parse private companies that do not disclose regular financial statements and to map out linkages between companies that are competitors and clients. It can also exploit leads and lags between how their bonds react to developments. For example, if a cement company seems to be doing well, then it might indicate that the homebuilders it supplies are also booming.

“We are at the infancy of quantitative fixed income investing, but we are also at the infancy of electronic fixed income market-making,” says Robert Lam, the other co-head of credit at Man Numeric. “Structurally, credit markets are changing.”

Advances in computing, cleaner, longer-term trading data and a critical mass of bond market research have now created a tipping point for systematic fixed income investing, according to Linda Gruendken, lead scientist at Cantab Capital, owned by Swiss asset manager GAM Systematic.

GAM’s shift into credit comes as the firm tries to revive its fortunes following a scandal surrounding a top fund manager, which came after a big write-down on the acquisition of Cantab. Last year Cantab’s Quantitative fund lost 23%, although this year it is up 22%.

Not everyone is convinced that bond markets represent a new gold rush for quants. Mihir Worah, one of Pimco’s top executives who leads its own quant efforts, points out that groups like his have already been mining the bond market’s inefficiencies for decades. “It’s the next frontier. But the pickings may not be quite as fertile as some people think, as the easy pickings are already done,” he says.

AQR, the quant investment group that launched its first systematic bond mutual fund last year, described its challenges to the FT. “When the rubber hits the road, someone sometimes has to do the trades,” concedes Scott Richardson, co-head of fixed income at AQR. “There are times the model will want to execute a trade and we can’t do it.”

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