A successful systematic credit strategy is not just about predicting returns. It equally relies on accurately forecasting the associated risks and, crucially, the transaction costs, described as avoiding giving a 'liver and a kidney to Goldman Sachs.'
The common practice of bifurcating credit portfolios into 'investment grade' and 'high yield' is an artifact of historical benchmarks and institutional mandates, not an economically optimal approach. A purely systematic view would blend them based on risk characteristics.
Unlike discretionary managers with narrow focus, a systematic process has a view on every bond continuously. This allows it to act as a liquidity provider—trading opportunistically when others are forced to transact—and capture implementation alpha, effectively being 'paid to trade.'
Systematic credit comprises only 2-3% of active funds, versus 20% in equities. This lag is not due to performance but to institutional inertia, incumbent resistance, and the perception of strategies as 'black boxes.' Acadian's Scott Richardson argues transparency is the key to overcoming this.
Systematic models don't attempt to forecast unpredictable shocks like policy changes. Instead, they build portfolios with 'guardrails'—diversifying away concentrated macro risks like sector or country bets—to ensure resilience and avoid being badly damaged by any single event.
Before seeking exotic alternative data, systematic credit investors must solve a more fundamental problem: correctly mapping standard financial and market data to the specific bond-issuing legal entity within a complex corporate hierarchy. Getting this wrong invalidates any model.
An extensive study of 4 million scenarios by Acadian shows that market timing strategies for credit—exiting when spreads are tight and re-entering when wide—underperform a simple buy-and-hold approach approximately 70% of the time. The roll-down return from the yield curve is consistently underestimated.
In credit markets, where transaction costs can reach 70-80 basis points for high-yield bonds, a systematic strategy's success hinges equally on its trading efficiency as on its return forecasts. A good model is useless if its alpha is consumed by trading costs.
Contrary to marketing narratives, Acadian Asset Management's analysis finds no evidence that private credit generates higher risk-adjusted returns than public credit. Analysis of private issuers within public indices shows they are simply riskier firms with higher yields to compensate, not a source of alpha.