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Analysis of syndicated leveraged loans shows that exposures linked to short-term momentum and valuation styles are well compensated. Active credit managers with momentum- and value-neutral trading strategies neglect a source of additional return.


Overview

This paper extends the analysis of systematic investment approaches to broadly syndicated leveraged loans. We find that exposures linked to (short-term) momentum and valuation styles (and a combination thereof) are well-compensated: monthly rebalanced long-only portfolios of high value and momentum loans generate Sharpe and information ratios well above one and economically and statistically significant alphas. Factor portfolio performance deteriorates but remains significant over longer investment horizons. An important implication of our research is that active credit managers employing loan trading strategies that are momentum- and value-neutral do not make use of a viable source of additional return.

About the Authors

Thomas Mählmann

Thomas Mählmann is a professor of finance and Chair of Banking and Finance at the Catholic University of Eichstaett-Ingolstadt, Ingolstadt, Germany.

Galina Sukonnik CFA

Galina Sukonnik is a portfolio manager at the Multi Asset and Solutions Group, DWS International GmbH, Frankfurt am Main, Germany.