Systematic lending can reduce drawdowns and help investors hit the “liquidity jackpot.”

Systematic fixed income investing can help investors mitigate the effects of market downturns and generate returns that are uncorrelated to actively managed fixed income strategies.

That is the thesis laid out in a new report by AllianceBernstein. The manager argues that systematic fixed income strategies, backed by advances in data science and trading analysis, are finally ready for prime time.

AllianceBernstein has used quantitative tools to invest in fixed income since 2004, said Scott DiMaggio, co-head of fixed income. During this time, computers have become more powerful, while more detailed data on the fixed income markets is available and can be gathered. Today, the money manager collects three and a half million data points on fixed income securities every day — including bids, asks and trades — and its analysis is proving fruitful in showing the benefits of systematic lending.

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

AllianceBernstein simulated the rolling three- and five-year returns of US investment grade and US high yield systematic bond portfolios from January 2010 to December 2022 Bloomberg US Corporate Fixed Income Index. The high yield strategy returned 7.2 percent, beating the 5.8 percent returned by the Bloomberg US Corporate High Yield Index. But the systematic strategies had the same volatility as their respective benchmarks.

Taken together, returns and volatility suggest, according to the AllianceBernstein report, “strong potential for systematic fixed income strategies to generate consistent alpha and improve Sharpe ratios.”

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

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

Liquidity is the key issue affecting a fixed income manager’s ability to outperform,” the report said. As a result, AllianceBernstein is applying its quantitative analysis to the wealth of data it’s collecting in hopes of making markets more predictable and “improving our chance of hitting that liquidity jackpot,” DiMaggio said.

Systematic fixed income securities are able to generate new, actionable trading and portfolio construction ideas, he added.

There was a great deal of interest in systematic fixed-income investments heating up in recent years and DiMaggio reckons these strategies will eventually become just as prevalent in quant equity. But it’s still early. “I’m not even sure if people see it as a mainstream way to manage money in fixed income right now.”

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