Investors’ Dilemma: How Can We Achieve Our Return Objectives in This Environment?

Abstract

The current low-volatility environment challenges fixed-income managers to maximize excess return. One approach for doing so is to hedge exposure to the macro factors that explain the vast majority of a sector’s return in order to isolate the unique sources of return and risk for that sector. Unique return and risk are then used to raise the low-return, low-risk efficient frontier and markedly improve the information ratio of the optimal portfolio.