Quant’s Next Frontier: Harness New Opportunities in Complex Markets
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Text on screen: Nick Granger, Portfolio Manager, Quantitative Analytics
Nick: We've seen a broad move in quant in recent years to embrace markets which are more complex to access, for example assets like emerging markets, credit, as well as various volatility related assets.
Text on screen: Quant strategies generally have tended to fare better in areas where barriers to entry are high
Images on screen: Emerging market countries
Quant strategies have generally fared better in these assets where the barriers to entry are higher, potentially making inefficiencies more prevalent.
In addition, such markets have tended to exhibit diversification properties, either opening up entirely new opportunities or expanding the opportunity set of existing strategies.
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PIMCO has been for decades at the forefront of trading exactly these types of assets. And as quants we're extremely fortunate to be able to make use of PIMCO's capabilities and experience to implement novel quant strategies in these areas.
If we want to build a mortgage strategy, we can sit down with the PIMCO mortgage desk and talk with them about how they
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think through value and risk within their asset class, and build their insights into our systematic strategies.
Quant credit in particular has been a much talked about area recently, but requires a lot of investment in infrastructure to design strategies that work and can be executed efficiently.
It's much more difficult than simply applying what works in equities to corporate bonds. So we’re spending a lot of time with our 80 person credit research team and our credit portfolio management teams,
Text on screen: Quant credit strategies require a highly nuanced understanding of the credit markets
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to understand the nuances of these markets, and design strategies that work both in theory and in practice.
For example, shorting cash bonds is not as simple as shorting cash equities. And these differences need to be accounted for in strategy design. Also, companies may issue dozens of bonds versus single issues of common stock. So it's important to be able to differentiate between issuances and account for the important differences that may be hard to spot on the surface. This is one huge opportunity for fundamental investors to collaborate with quantitative investors with mutual benefits.
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All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. 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. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. Diversification does not ensure against loss.
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