Systematic Insights: A different path to high yield alpha? | Insight Investment

Insight’s systematic high yield alpha approach aims to deliver differentiated alpha streams by taking small, highly diversified security selection positions across the entire high yield market. 

Insight’s systematic US high yield alpha strategy completed its first full year.

The strategy delivered +94 bps (gross alpha) (Figure 1) in an environment of historically low market dispersion.

As the strategy reaches its milestone, we offer the case for a systematic approach to high yield alpha.

Figure 1: Insight’s Systematic US High Yield Alpha strategy came close to its target in a low-dispersion market¹

Can systematic high yield approaches offer some advantages over traditional active strategies?

Systematic credit strategies use models rather than credit analysts to pinpoint security selection opportunities.

Credit analysts are dedicated specialists and aim to know companies inside out, but they are resource intensive. Covering all ~900 US high yield issuers would be unrealistic for any manager. 

Systematic models may not delve as deeply as a credit analyst, but they can process 900 issuers as easily as one.

As such, whereas fundamental active strategies may be more likely to position among issuers their analysts cover, systematic strategies can aim to spread their active positioning more broadly.

Perhaps as a result, our analysis indicates a negative alpha correlation between the two approaches (Figure 2).

Figure 2: Insight’s systematic high yield strategy may be negatively correlated against traditional strategies²

Insight’s backtested version of the strategy has also appeared to perform well overall against traditional strategies (Figure 3).

Figure 3: Insight’s backtested high yield alpha returns have been encouraging³

Insight’s systematic approach combines three models

Insight’s systematic high yield alpha approach is designed to benefit from the interaction of three proprietary models:

Figure 4: Insight’s systematic models could offer collective alpha potential through all market conditions⁴ 

Insight’s approach is time tested

Insight’s systematic team has been developing and applying these models for over 20 years and has applied them within Insight’s Efficient Beta US High Yield strategy (incepted in 2012) targeting alpha to compensate for costs and trading frictions.

Figure 5: Insight’s systematic high yield approach is time-tested through multiple credit cycles⁵ 

Insight’s trading platform is also a key component of its strategy. We employ technologies such as “credit portfolio trading” and “inventory collapse trading” with the aim of materially reducing transaction costs relative to traditional over-the-counter trading. A high degree of liquidity is essential for facilitating security selection down to the smallest, most obscure and thinly-traded names.

In our view, a systematic approach to high yield may be worth considering for those looking for exposure to the high yield market or those looking to diversify their existing exposure.

If you are interested in more information on Insight systematic high yield strategies, please do not hesitate to contact us.