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Digital Subscriptions > The Hedge Fund Journal > Issue 109 - November 2015 > The Tradex Relative Value Blog Series

The Tradex Relative Value Blog Series

Tradex Global Advisory Services, LLC

THE TRADEX RELATIVE VALUE BLOG SERIES PROVIDES AN IN-DEPTH DESCRIPTION OF STRUCTURED RATES ARBITRAGE AND OTHER OPPORTUNISTIC FIXED INCOME STRATEGIES IN THE CONTEXT OF CURRENT MARKET DYNAMICS.

Our latest research series considers relative value fixed income investment strategies that are liquid, market neutral and consistently produce alpha. We believe investors’ chief concerns include a changing U.S. interest rate policy, mitigating risks away from credit exposure, and maintaining liquid positions given the potential for increased volatility. In light of the current market environment as well as managerial constraints and goals, we outline a multi-strategy approach that touches on the above-mentioned environment and concerns.

SOURCES OF ALPHA IN A MULTI-STRATEGY FIXED-INCOME PORTFOLIO

Overview

Given the recent increase in volatility and uncertainty in the global economic outlook, the rising tide that lifted all ships has given way to tumultuous waves that will pose problems for those who have been simply going with the tide. Alpha, the most frequently used metric for quantifying risk-adjusted returns, is measured as the difference between the unleveraged portfolio return and passive market exposure. Alpha is a relative metric with roots stemming from modern portfolio theory for traditional investments. During the strong bull market lasting from 2009 to 2014, beta exposure was often misclassified as alpha in fixed income strategies. An active, market-neutral approach that combines both strategic and tactical positioning is well-suited for generating alpha through exploiting market inefficiencies, while remaining insulated from the ebbs and flows of the market. However, market-neutral strategies can be thought of as a source of pure alpha since return is provided without benchmark exposure. Alpha can be enhanced through targeted, tactical exposure when market dislocations have created asymmetric return profiles with positive skew. Capitalising on these dislocations provides tactical alpha through return enhancement and diversification. The following discussion focuses on the drivers of alpha within the context of a multistrategy fixed-income portfolio.

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