Viewpoints

The Edge in Quant Investing in Credit

Quant investing in credit is an exciting frontier, but success relies on more than just the application of what is known to work well in equities. Learn how PIMCO’s 50+ years of credit expertise gives our clients an edge.

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Text on screen: PIMCO

Text on screen: FULL PAGE TITLE GRAPHIC: What does it mean to use quantitative investment strategies in equities and credit?

Text on screen: FOOTER GRAPHIC: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: Paul-James White, Quantitative Portfolio Manager

White: So when we talk about quant investing, what we're really talking about is rules-based, systematic trading strategies.

B-roll: People working at desks / trade room floor.

So equities are actually a really natural place for quant investors, they've been around for decades. It's one of the original places where quants were and it kind of makes sense because corporate, there's thousands of different companies and there is a huge wealth of data, so both of these things are great for quant investors.

Chevron Split Screen - Text on left: Quant investing for equities is looking through data, finding a repeatable edge, and harvesting that edge – B-roll on right: People working at desks / trade room floor.

Fundamentally, quantitative investing for equities is just looking through the data, finding some repeatable edge and trying to harvest that edge.

Rennison: So if we contrast with corporate bond trading, corporate bond trading has been around in various forms for decades, of course especially here at PIMCO, over around 50 years, but quantitative investing in credit is a newer phenomenon for a long time liquidity, availability of data, these were sort of challenges that made credit investing from a quant perspective more difficult.

Text on screen: Graham A. Rennison, Quantitative Portfolio Manager

That really started to change about five years ago and we're now seeing a very sort of interesting space develop that we think is exciting, lot of potential for quant techniques to be applied really in a new asset class and to begin with that started out trying to borrow a lot of the ideas from the equity world, similar sort of factors, financial data, price analysis and that that continues.

Chevron Split Screen - Text on left: Credit’s unique challenges provide opportunities for quantitative investors - B-roll on right: People working at desks / trade room floor.

So credit has unique challenges, but because it is a little bit harder to access and is newer and the data is a little bit more difficult to find and to clean that all in turn leads to what we think are more opportunities. So, we're very excited about the potential for quant in the credit world.

Text on screen: FULL PAGE TITLE GRAPHIC: What are some exciting new areas of research across credit and equity markets?

So, there's actually a lot of exciting stuff in terms of research going in quant credit, we have many projects underway. Again, being in a slightly newer space with data that's really only just starting to become available in large amounts in the last few years. There's a really very interesting spectrum of research that we can look at.

Text on screen: FULL PAGE LIST GRAPHIC:  TITLE - Research in quantitative credit:  LIST - Different industries, Different regions, Trading data patterns

So this can be everything from broadening our universe, looking at different industries, different regions and things like also trading data. We're doing a lot of work in that space as well as sort of refining our signals and models to sort of build in all the latest thinking.

White: I think equities and saving credit are one of the things we're doing, which is really quite interesting is looking not just at the universe as a whole, but trying to dive down into sector specific signals and that's really interesting from a quant perspective because you give up breadth. So, there are fewer names, but then you are also feeding in additional information.

I think it's a rich area, especially working with the discretionary managers.

Chevron Split Screen - Text on left: We aim to quantify and systematize sector-specific insights - B-roll on right: People working at desks / trade room floor.

What we are trying to do in quant is we're trying to take some of their insights, which are specific to sectors or small clusters of names and quantify them, systematize the ideas and I think that's exciting and I think what also is really exciting is what Graham mentioned is sort of the interplay between the two asset classes we have.

B-roll: People working at desks / trade room floor.

So, some information is only going to be available in the credit market and some information is only going to be available in the equity market and I think the more we can use models from one place to trade the other, that's definitely a really exciting place to be.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

Disclosure


Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Equities may decline in value due to both real and perceived general market, economic and industry conditions. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Managed futures contain heightened risk, including wide price fluctuations and may not be appropriate for all investors. Derivatives and commodity-linked derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Commodity-linked derivative instruments may involve additional costs and risks such as changes in commodity index volatility or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in derivatives could lose more than the amount invested. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Entering into short sales includes the potential for loss of more money than the actual cost of the investment, and the risk that the third party to the short sale may fail to honor its contract terms, causing a loss to the portfolio. Swaps are a type of derivative; while some swaps trade through a clearinghouse there is generally no central exchange or market for swap transactions and therefore they tend to be less liquid than exchange-traded instruments. Management risk is the risk that the investment techniques and risk analyses applied by an investment manager will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the manager in connection with managing the strategy. Diversification does not ensure against loss.

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