Fixed Income

Investing with Style in Corporate Bonds

Topics - Fixed Income Factor/Style Investing

${ numberSection } ${ text }
Investing with Style in Corporate Bonds

Working Paper            

In a comprehensive analysis of the cross-sectional determinants of corporate bond excess returns, the authors find evidence of positive risk-adjusted returns associated with four investment characteristics, or “styles” — carry, defensive, momentum and value. These returns are diversifying with respect to both known sources of market risk (e.g., equity risk premium, credit risk premium and term premium) and style returns that have been documented in equity markets (e.g., size, value and momentum).

The authors add that realistic long-only portfolios can be constructed to achieve maximal exposure to these styles. Based on a broad sample of U.S. corporate bonds from January 1997 through November 2013, they found that an active long-only portfolio annually earned 1% in excess of a value-weighted benchmark of all corporate bonds in the BAML dataset, with an Information Ratio of 0.60. This long-only portfolio is aware of transaction costs, trading limits and position constraints, suggesting it is possible to build meaningful corporate-bond portfolios with styles exposures.

The analysis examines the exposures of actively managed credit hedge funds and actively managed credit mutual funds and finds that both have significant exposure to “beta,” primarily through exposure to credit risk premium, as well as minimal exposure to our documented styles with the exception of “carry.” Thus, despite evidence of a robust relation between styles and corporate bond excess returns individual credit funds are underexposed to styles.

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.


The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.