Absolute return strategies glossary

Duration

The weighted average length of time to the receipt of a bond’s benefits (coupon and redemption value). Duration is a measure of the sensitivity of a bond’s price to a change in interest rates, expressed as a number of years. Using interest rate swaps, we can implement duration strategies that allow us to invest in specific areas of the bond market.

Relative value

Where an index or asset appears to offer good value relative to another. For example, we may prefer the UK FTSE All-Share Index relative to the German DAX Index.

Optionality

Strategies implemented using options, such as expressing a view on implied volatility, which is the future level of volatility anticipated by the market.

Credit spreads

The spread on credit is the additional yield above that from government bonds received by investors for holding a bond with a particular credit rating. For example, the spread on AAA-rated debt will be less than the spread on BBB-rated debt. We can profit from a change in credit spreads by buying or selling credit default swaps.

Stock selection

The choosing of individual stocks to be held within a portfolio. It’s possible to isolate the stock selection skills of a fund manager by investing in their portfolio alongside an index future to guard against market falls.

Break-even rates

The inflation rate necessary for an index-linked bond to return more than a conventional bond of equivalent maturity. We can profit from break-even rates where our view on the future level of inflation differs to the market’s view.

Short rates

Short-term lending or bond market rates. We can profit from short rates given our view on current levels compared to our future expectations.

REIT

Real Estate Investment Trust