Factors in Global Bond Portfolios

Factor models are now pervasive in investment management. The primary attraction of factor models is that they help explain asset return behavior using a parsimonious set of return drivers, hence simplifying the construction and analysis of portfolios consisting of many assets. Because factor models provide a transparent view of the systematic risks to which a portfolio is exposed, they can be used for both risk management and alpha generation. Indeed, portfolio managers will often try to control the amount of their active risk deriving from systematic risk (beta) versus idiosyncratic risk (alpha). Alternatively, other portfolio managers may want to stray from the factor profile of their benchmarks in order to generate incremental alpha based on systematic bets. Although some factors have a purely statistical nature, other factors are derived from economic variables or fundamental variables, thereby directly related to asset return behavior…