Why aren't more people getting into fixed income investing over equities?
I've read some posts on this forum about how the FI investing universe is much larger and has more inefficient markets than equities. It's also less at risk of being automated considering how much different issuances there are and how illiquid many of them are. Out of curiosity, why do the majority of people going to the buyside work in equities investing instead of FI? Are equities generally more interesting? I've understand that the comp ceiling on something like U.S. treasuries is low given how stable it is, but distressed and junk debt and special situations investing seem to provide just as much return potential as any asset class.
You know, I'd be interested if I saw a strategy that could consistently outperform the S&P 500 on both a risk adjusted and absolute return basis. It would also need to beat out the alpha that can be generated through research in directly comparable asset classes in terms of risk adjusted returns such as merger arb.
However, my knowledge base is mostly in equities, so I feel like I would need to determine some way to generate outperformance by targeting undervalued fixed income products like those you might see issued by distressed organizations, like corporate junk bonds. I think there might be the possibility of alpha there if superior analysis and insight is applied, but it seems trickier than picking out undervalued stocks. I also see the inverse possibility in finding FI products that are overvalued, but I typically skew long only (in the equities world) to avoid potentially unlimited downside because the market rarely corrects pricing inefficiencies on my schedule.
That's my take on the matter- I'm sure others have more insight than I do.
TLDR: I don't have the magic touch for the asset class yet, and I'd need some guidance to figure it out.
Though one component of fixed income—shorting has losses capped (repayment of principal + coupons) unlike equities
Seems to be more ways to hedge downside risk there as well given how formulaic bond pricing is (since you’re not trying to value outperformance / cash flows)
Bonds have underperformed equities for like a couple decades now. People aren’t excited of earning a 200bps spread when stonks are going to the moon. Bonds are looking more attractive now though due to their high yield.
Can't high yield bonds deliver similarly high returns to growth stocks over the last bull market decade? I understand that companies like Tesla and Google look like their stock prices will appreciate forever at the first glance, making the junk bond of a Midwestern mining company look less attractive but surely people will recognize that the former is way overpriced.
I’m sure that midwestern mining company has great growth prospects to continue paying their debt obligations as interest rates go through the roof.
You generally (very general so don’t get mad) make less $ in fixed income vs equities. I think that’s the simple answer
Bonds and credit are much more profitable than equities **for sell-side and market-makers**. The bid-ask spread for some illiquid bonds can be over a dollar or two. But bonds are usually much less profitable **for buy-side traders**. If you're a pension fund happy with steady 4-7% returns over the long term, then bonds are great. But most buy-side traders are looking for higher returns and/or shorter term trade horizons.
With equities, you have potentially infinite return and the price can shoot up tomorrow so you can do short-term trades. But with bonds, your upside is capped and any price appreciation will be slow-moving. The only way to get huge returns on the buy-side with bonds is buying distressed debt and hoping the company improves, but that requires a lot more information than most traders have.
Yeah that's a pretty gross oversimplification.
For the end user (as a PWMer), there is a huge difference between accumulation and distribution. These are different phases of a client's life. I refer to it as "The Lifestages of Money". During working yrs, accumulate. That's easy. Nearing and during retirement: preservation, income replacement, legacy, etc. Very different MO and a VERY VERY different framework. A recent client meeting is a good example (anecdotal but realistic). Getting ready to retire within 2 yrs. 2.5M in low beta stocks and funds. Realizes he has enough and wants to "derisk" while maintaining attractive income (not just yields but the actual distribution). Have him positioned in Structured Notes, Bond Ladders (individual bonds, not funds- all hold to maturity so very predictable income), and some solid "Aristocrat" type stocks. What's important to him is not just yield, but far more important, actual distribution. If he gets X he's happy. This is not the same guy who was a growth investor prior. I like to say, "The investments that helped get you there aren't the ones to necessarily keep you there, certainly based on your new risk tolerance."
Accumulation planning is pretty simple. Income planning and management far more complex. Great industry to enter and excel in.
Cus it sounds boring and unintuitive. I personally am pursuing fi trading tho. I think it's a pretty broad field and there's a wide spectrum of strategies ranging from macro to distressed.
Because equity has higher returns because it’s the lowest in the capital structure. Higher returns equals higher potential for more money to be made. You could argue though that debt market has more inefficiencies and for those smart investors higher returns though. I would argue that some of the smartest investors are on the debt side. Think of Elliot and Apollo, who have an edge with complex teams of lawyers etc.
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