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For years David Horowitz at Agilon Capital was a rare breed in the bond market: a quant in a notoriously old-school company where pricing was a call rather than a click.
Sixteen months of pandemic change all that.
The era of working from home fuels a wave of bond e-commerce which gives Horowitz the belief that a long-standing quantitative revolution is finally ready to sweep the debt world.
Long credit positions held by quants have doubled since 2018 according to Man Group data, surpassing 20% growth of other asset managers as systematic players grasp the rapid modernization of the market, as they did for stocks years ago.
“Credit is going through a similar evolution,” said Horowitz, who previously led the pioneering systematic credit team at BlackRock Inc. launch its own fund of $ 290 million. “As we become more electronic, we should expect the same types of forces to come into play.”
Quants have been saying this for years of course, only to see their mathematical models frustrated by the heavy and complex world of debt. The difference now is that they can have a market that is liquid and transparent enough to accommodate their constant churn rate.
Electronic platforms like MarketAxess and TradeWeb accounted for 37% of quality trades and 26% of high yield trades in May, 8 percentage points more than the year before, according to data from the Greenwich Coalition.
This sets up a virtuous circle, where banks deploy more algorithms to value more bonds. Add a year of record flow to credit exchange-traded funds, and a wide range of securities becomes easier to trade – vital for a cohort that typically holds hundreds of positions and trades more often than the average fund.
“This helped answer the question of ‘can we trade this tomorrow? “” said Paul Kamenski, co-head of credit at quantification firm Man Numeric.
Liquidity in the bond market has long been fragmented by its very nature – companies typically issue multiple bonds. This means quants can see their models spit out a dream wallet but have to adjust it based on what can actually be traded, Kamenski said.
“We had to try and do things that were less natural in quantitative strategies,” like trading larger sizes or restoring dealer inventories, he said. “It’s still difficult today, but it has become more manageable.
This doesn’t necessarily mean that the entire market is suddenly very liquid – complaints about the difficulty of unloading large blocks are everywhere.
But it has become easier to move smaller sizes and figure out where each bond is trading, helping to detect signals and lower transaction costs, Horowitz said.
At bank trading desks, Asita Anche of Barclays Plc has seen an increase in the use of algorithms, especially for executing small trades. But she emphasizes that people are still essential in bonds because liquidity is more fragmented than in equities and it is more difficult to manage risk.
“The future is not for algos to take streams away from humans,” said the head of systematic market making and data science. “They are humans enhanced by algorithms and automation. “
With that in mind, Anche creates algos and data analytics for voice traders, and even a Netflix-like recommendation engine that finds titles similar to what a client wants to trade.
Bond quants remain a tiny minority – these long positions total around $ 23 billion, according to Man Group, compared to $ 537 billion for other managers. And the systematic group operates a range of strategies, ranging from equity style factors like value or momentum to arbitrage or trading based on the movements of an issuer’s shares.
All of this makes performance hard to judge, and data is scarce. A Premialab index of systematic credit strategies built by investment banks has lost 5% in the last three years of rising markets and gained nearly 3% in 2021. Among global bond mutual funds, quants followed other investors over a three-year horizon, according to eVestment data. .
Nonetheless, the rise of e-commerce in stocks has brought in billions to quants and reorganized the market. Many bond players predict a similar trajectory for their asset class, with the bonus that the kind of the overcrowding that has undermined stock market strategies is far from being achieved.
“I’ve been doing this for about 20 years and for the most part doing this type of systematic credit – people wouldn’t even know what I’m talking about,” said Horowitz at Agilon. “Credit is still in its infancy. “
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