Fixed income arb

Fixed income arbitrage invloves taking long and short positions in fixed income instruments based upon expected changes in the yield curve and/or credit spreads. Is this really arbitrage? Sounds like active managment to me without short restrictions.

agreed. sounds like active duration management to me.

These are hedge fund subcategories by the way…

I think it is arbitrage. My rationale may completely be incorrect but this is how I understand … Arbitrage is investing in mispriced securities to take advantage of the mispricing, correct? you may be thinking of riskless arbitrage So based on changes in the yield curve or credit spreads you will assess pricing of varied FI securites and go long and short on undervalued and overvalued securities, respectively.

oh… in that case, CFAI says fixed income arb managers attempt to identify overvalued and undervalued securities based primarily on the basis of expectations of changes in the yield curve or credit quality of various issues or market sectors. This helped clear it up for me… “FI arb portfolios are generally neutralized against directional market movements because of the long and short positions.” With active management, we usually retain a net long position, just at a different point on the curve.

Okay. Makes sense. I am starting to get a little worried about schweser’s coverage though…