The Factor Edge : Optimized Private Debt Investing

Kurzfassung/Abstract

This article expands the investigation of systematic investing to broadly syndicated, leveraged loans. The results reveal that systematic exposures to (short-term) value, momentum, illiquidity, quality, low risk, carry, and a combination thereof are well rewarded. Monthly rebalanced long-only factor portfolios exhibit impressive Sharpe and information ratios, as well as economically and statistically significant alphas. While the performance of factor portfolios declines over longer investment horizons, it remains significant. A key implication of this research is that active credit managers employing factor-neutral loan trading strategies are potentially overlooking a viable source of incremental returns. Thus, the authors propose factor construction/screening approaches that are easy to use and implement from a practical perspective.