Alternative Thinking

The Illusion of Active Fixed Income Alpha


Topics - Fixed Income Portfolio Risk and Performance

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The Illusion of Active Fixed Income Alpha

Do fixed income managers (FI) generate alpha? In this Alternative Thinking, we take a deep dive into the determinants of excess of benchmark returns for a broad set of popular active FI categories (Global Aggregate, U.S. Aggregate, and Global Unconstrained Bond). Our analysis finds that passive exposures to traditional risk premiaprimarily term risk, corporate credit risk, emerging markets risk, and volatility riskexplain a majority of FI manager active returns. There is largely no outperformance at the category level after controlling for exposures to well-known traditional risk premia. The implication for asset owners is clear: traditional discretionary active FI strategies offer little in the way of true alpha.


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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


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AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.