Unfollowing the crowd

The below is the executive summary of our major piece of fixed income thought leadership: Unfollowing the crowd.

Macroeconomic projections are generally poorly calibrated, with large margins of error, and their record in predicting recessions is poor.

Nonetheless, many investors put great emphasis on their forecasts when determining investment strategies.

We believe that active investors in global government bond markets are likely to be better served by building an investment process around looking for and exploiting other market participants’ overconfidence.

We have based our investment process on these insights:

• We try to identify the limits of what is knowable. Where we find evidence of market overconfidence beyond those limits, we believe we could profit by taking the other side of such arguments
• We think we can find opportunities for potential alpha generation on our understanding of the behaviour of rules-based investors, which can lead to exaggerated market moves
• We try to minimise our own biases by insisting every trade has a clear and documented rationale. We also define in advance the events necessary to convince us our original view was not correct

Read the full article: Unfollowing the crowd: How our rates investors seek to avoid the pitfalls of prediction in actively managed government bonds.