(Systematic) Investing in Emerging Market Debt

39 Pages Posted: 2 Mar 2020 Last revised: 4 Mar 2020

See all articles by Jordan Brooks

Jordan Brooks

AQR Capital Management, LLC

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Zhikai Xu

AQR Capital Management, LLC

Date Written: February 4, 2020

Abstract

We extend the analysis of systematic investment approaches to emerging market (EM) fixed income. We focus on hard currency bonds issued by emerging sovereign and quasi-sovereign entities. We find that systematic exposures linked to carry, defensive, momentum and valuation themes are well compensated and lowly correlated in EM markets. A transaction-cost and liquidity aware long-only portfolio generates an Information Ratio above 1. We further show that excess of benchmark returns for a broad set of EM managers are (i) largely explained by passive exposures to EM corporate credit excess returns and EM local currency returns, and (ii) have non-trivial macroeconomic exposures (growth, inflation, volatility and liquidity). A systematic approach to EM debt may be a powerful diversifier.

Keywords: emerging market bonds, fixed income funds, systematic investing

JEL Classification: G12; G14; M41

Suggested Citation

Brooks, Jordan and Richardson, Scott Anthony and Xu, Zhikai, (Systematic) Investing in Emerging Market Debt (February 4, 2020). Available at SSRN: https://ssrn.com/abstract=3531590 or http://dx.doi.org/10.2139/ssrn.3531590

Jordan Brooks

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Scott Anthony Richardson (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Zhikai Xu

AQR Capital Management, LLC

Greenwich, CT
United States

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