An investment policy whereby managers take certain direct action prior to final maturity of underlying bonds in order to gain from potential changes in future interest rates. This involves buying and/ or selling bonds prior to their maturity dates, and spotting any relative mispricing opportunities in the fixed-income market.
The active bond portfolio management, as a strategy, focuses on total returns from component debt securities rather than risk elimination. By nature, active management entertains a higher risk tolerance than passive management. Active managers are willing to take the risk associated with betting on the future direction of interest rates.
A bond portfolio can be managed in a number of ways, primarily including active management, passive management, or a hybrid management that involves both styles. Passive strategies are like the buy-and-hold indexing which entails minimal trading and mainly focuses on attempts to match a bond index. Active strategies include interest rate prediction and valuation analysis, engaging more in active trading to try to outperform the market based on the predictions made.
