Karishma Kaul, Head of Systematic Fixed Income Strategies, Fidelity Investments
Sep 22, 2023
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Karishma Kaul, Head of Systematic Fixed Income Strategies at Fidelity, discusses the role of common factors in fixed income factor investing, including value, momentum, and quality. She explores the challenges of implementation and potential return dampening due to crowding. Karishma shares her background in engineering and experiences in finance. The podcast also covers indexed-based distortions in fixed income and initiatives for women in finance.
Factor investing in fixed income is still a nascent strategy, with potential for delivering incremental risk-adjusted returns through key factors like value, momentum, and quality.
Implementing factor strategies in fixed income requires careful consideration of trading frictions, liquidity, and transaction costs.
Value, momentum, and quality factors play important roles in fixed income, providing insights beyond traditional alpha and beta, with value determined by comparing spreads and intrinsic value, momentum more prominent in lower quality bonds, and quality factors offering downside protection during volatile periods.
Deep dives
Fixed income factor investing is a nascent strategy
Factor investing in equities has been well established, but in fixed income, it is still an emerging strategy. Karishma McCall, head of Systematic Fixed Income Strategies at Fidelity, discusses the potential of factor investing in fixed income. She highlights key factors such as value, momentum, and quality, emphasizing the importance of each factor in delivering incremental risk-adjusted returns. She also explains that combining factors can further enhance the value due to their low correlation. However, implementing factor strategies in fixed income requires careful consideration of liquidity and trading frictions.
Challenges and considerations in fixed income factor investing
Karishma McCall addresses the challenges and considerations in implementing factor strategies in fixed income. She discusses issues such as trading frictions, liquidity, and transaction costs that can impact the effectiveness and efficiency of factor investing in fixed income. She emphasizes the need for robust risk models that capture the different dimensions of risk in fixed income, as well as transaction cost models to accurately assess costs. McCall also mentions the risk of potential crowding in the future as education and adoption of factor strategies increase in fixed income.
The role of value, momentum, and quality factors in fixed income
Karishma McCall explains the role of value, momentum, and quality factors in fixed income. She highlights how these factors contribute to risk and return attribution and provide insights beyond traditional alpha and beta. McCall discusses how value factors in fixed income can be determined by assessing the spread over treasury and comparing it to the intrinsic value of the security. She also explains how momentum factors work differently in fixed income compared to equities, with momentum being more prominent in lower quality bonds. Additionally, she emphasizes the importance of quality factors in generating consistent performance across business cycles and providing downside protection during volatile periods.
Implementation challenges and advancements in fixed income factor investing
Karishma McCall discusses the implementation challenges and advancements in fixed income factor investing. She highlights the importance of trading efficiency, liquidity, and transaction cost models in ensuring effective implementation of factor strategies. McCall also discusses the potential impact of technology, such as electronic trading and portfolio trading, in improving efficiency and reducing transaction costs in fixed income. Furthermore, she explores the potential application of large language models and AI in addressing coverage and data challenges in fixed income factor investing.
The evolving landscape and opportunities for women in finance
Karishma McCall shares her insights on the evolving landscape and opportunities for women in finance. She reflects on her own career path and highlights the progress made in creating a more inclusive and meritocratic environment in the industry. McCall emphasizes the importance of taking risks, listening, and standing up for oneself in pursuing career growth. She also acknowledges the positive impact of initiatives around diversity and inclusion and internal mobility in providing more opportunities for women in finance.
To be sure, factor investing has been a thing in equities for some time now, with vast pools of capital managed by firms that employ a systematic approach to harvesting style factors like growth, value and momentum. In 2013, Asness, Moskowitz and Pedersen authored, “Value and Momentum Everywhere”, for the Journal of Finance, finding common factors in return attribution across 8 markets.
Still, a decade later, fixed income factor investing is a nascent strategy. Enter Karishma Kaul, Head of Systematic Fixed Income Strategies at Fidelity. With a masters in financial engineering from Cornell, she hit Wall Street in 2008, landing on a fixed income desk the day of the Lehman Bankruptcy. The ensuing financial crisis would provide valuable lessons on the limitations of theoretical models and the pitfalls that potentially arise from back-tests.
Our discussion shifts to fixed income factor investing. Karishma provides an overview of common factors, including value, momentum and quality. The latter, she argues can play an important stabilizing role during risk-off periods. She makes the point that each of these factors delivers incremental risk-adjusted return in isolation, but when put together, add further value due to favorably low correlation among them.
We discuss implementation, a process that can be complicated in fixed income where attention must be paid to trading frictions. Lastly, we touch on the risk of potential return dampening due crowding. Here, Karishma acknowledges this as a risk to monitor, but notes that the capital in these strategies is still small and there should be plenty of room for growth.
I hope you enjoy this episode of the Alpha Exchange, my conversation with Karishma Kaul.
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