Investment Process and Portfolio Characteristics
Portfolio construction in the fixed-income relative value space is more complicated than global macro or most equity strategies. Fixed-income relative value strategies include cash versus futures arbitrage, yield curve arbitrage, and swap basis trading. Strategies also include a wide variety of mortgage-backed securities relative value trades. Relative value trades involving mortgages include swap or treasury basis trades, new issue or TBAs versus seasoned mortgage pools, agency versus nonagency securities, CMOs versus underlying collateral, and many more.
Managers in fixed-income relative value strategies use a top-down approach similar to global macro funds to assess interest rate, inflation, GDP, and other macroeconomic trends. They also use a bottom-up, trade and market-specific set of analytics to evaluate the specific instruments’ relative pricing and the value of many arbitrage situations.
Ultimately, each fund's portfolio reflects the potential risks and rewards of any number of individual risk and return potentials identified across a wide range of individually attractive trades. In aggregate, the investment in each individual trade idea or strategy within the fund exposes the fund to a variety of portfolio risk and reward scenarios. Managers must carefully monitor and set trader and portfolio manager limits while remaining conscious of the net exposures of the fund as a whole. Portfolio exposures managed at the aggregate ...
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