The strategy invests in a liquid subset of bonds from the J.P. Morgan EMBI Global Index, selecting bonds based on carry, defensive, momentum, and value factors, and rebalances monthly.
ASSET CLASS: bonds | REGION: Emerging Markets | FREQUENCY:
Monthly | MARKET: bonds | KEYWORD: Systematic
I. STRATEGY IN A NUTSHELL
The strategy invests in a liquid subset of bonds from the J.P. Morgan EMBI Global Index, selecting the top 70% by trading volume and bid-ask spread. Each bond is scored monthly on four factors: Carry (higher spreads), Defensive (low inflation, strong asset-to-debt ratios), Momentum (positive returns in bonds, FX, equities), and Value (spread relative to credit ratings and equity volatility). Bonds are ranked based on these combined factors, and the portfolio is rebalanced monthly to emphasize higher-return, lower-risk opportunities in emerging markets.
II. ECONOMIC RATIONALE
Emerging market debt has grown substantially over the past two decades, with issuance expanding 430% across key J.P. Morgan indexes. The strategy filters for liquidity, retaining only bonds with larger size, tighter spreads, and better pricing quality. Subsequently, bonds are ranked using systematic factors—Carry, Defensive, Momentum, and Value—which have been shown to drive returns across asset classes, allowing investors to capture performance while managing risk in emerging market bonds.
III. SOURCE PAPER
(Systematic) Investing in Emerging Market Debt [Click to Open PDF]
J. Brooks, AQR Capital Management LLC; S. Richardson, AQR Capital Management LLC, London Business School; Z. Xu, AQR Capital Management LLC
<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.
IV. BACKTEST PERFORMANCE
| Annualised Return | 8.4% |
| Volatility | 8.4% |
| Beta | N/A |
| Sharpe Ratio | 1.06 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
