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Absolute Return Bonds Guide
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Management
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Operational Risk Management
In addition to managing the risks inherent in the derivatives themselves, an absolute return bond fund will acquire 'incidental' exposure to the risk of default of the counterparty with whom the deal is transacted, and this also needs to be managed. There are industry-standard methods for mitigating this risk.
There are also risks associated with the valuation, administration and settlement of derivatives. Here positions should be marked-to-market and valuations carried out independently. Where practical, quotes from several market makers should be sourced, or if this is not practicable other means should be used to verify that the price supplied by the market maker when a position is marked-to-market provides a reasonable estimate of its underlying value.
Fund Management - What fund management credentials are needed?
To manage this type of fund successfully, it is essential that the fund manager has a thorough understanding and practical experience of the full range of global bond markets and of the derivative instruments based around them.
The manager therefore needs to have considerable knowledge of the major government bond markets, as well as a thorough grounding in the factors driving the smaller, higher yielding emerging markets of Asia, Latin America and Eastern Europe. The manager also needs to have a good understanding of the factors influencing corporate bond markets for both the investment grade and high yield sectors.
It is crucial that the manager has the necessary expertise to accurately gauge the factors driving the performance of these markets. In particular, he needs to be able to access a wide range of economic data to help determine the likely trends in economic growth, inflation and interest rates, which are particularly relevant for government bond markets. For corporate bonds, both the economic and company environment require careful analysis. A successful bond strategy also requires the rigorous assessment of the likely patterns of future supply and demand for the various types of bonds as well as the relative attractiveness of different bond classes.
Indeed, such is the complexity and diversity of today's bond markets and derivatives that it takes a large, well-resourced investment team to make the most of the opportunities available. It is helpful if the fund manager is also able to draw on the specialist expertise of his colleagues. Consequently, it is vital that the company managing an absolute return bond fund has the critical mass to run this type of portfolio. Rigorous controls, such as stop-loss limits and the permissible amount of leverage, are vital tools in the management of an absolute return bond fund.
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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.
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