The absolute-return bond strategies grant managers the freedom to generate alpha from a host of sources, from large macro bets to security selection, while also providing downside protection.
"From our standpoint, it's just giving the manager the flexibility to invest in areas of the market that provide the best opportunity to add value within this asset class," Mr. Lubin said. Potential sources of alpha include high-yield debt, bank loans, non-dollar fixed-income, inflation-linked bonds and emerging market debt. Plus, some strategies enable the manager to make interest-rate bets or bets on the shape of the yield curve.
The move toward "best ideas" strategies ties into a broader trend to give managers more leeway in managing their portfolios. This represents a reversal of the shift toward narrow "style boxes" that occurred in the 1980s and 1990s.
"Some of the larger clients are … getting less focused on individual products. Instead, they are saying, ‘What are you good at? What are your best sources of alpha?'" said Peter Wilson, senior portfolio manager and strategist at Barclays Global Investors, San Francisco.
Each manager tends to play toward its strengths. For example, a fixed-income powerhouse like BlackRock is more likely to make macro bets, while a smaller shop such as MetWest emphasizes security selection.
An institutional mutual fund run by UBS Global Asset Management, Chicago, uses a duration band ranging from negative three to positive three years, short-selling fixed-income futures when portfolio managers believe interest rates will rise, said Drew Carrington, executive director and senior U.S. fixed-income portfolio manager. The strategy also makes heavy use of global securities.
But these strategies don't offer a panacea. "The cynical view is that it's just the same products, except they're shorting out the systematic risk of the products, and (repackaging) that excess return that's not related to the beta exposure," Mr. Rue said.
Investors have a variety of motivations for using these strategies, explained Wendy Cupps, managing director and product manager for absolute-return strategies at Pacific Investment Management Co. LLC, Newport Beach, Calif.
"Some people are looking for strategies that are not correlated with the bond market or are not dependent on the level or direction of interest rates," she said.
Others are looking to the strategies as a source of alpha generation, either as a stand-alone or as an alpha-transport portfolio, she added. Yet others are viewing them as hedge fund alternatives, Ms. Cupps said.
PIMCO offers three absolute return strategies, with a fourth waiting in the wings. Five years ago, PIMCO launched its most conservative one, with a target return of LIBOR plus 100 to 150 basis points. That strategy has attracted $11.1 billion in assets.
A high-octane hedge fund alternative, revamped last fall, has $318 million, while the moderate-return strategy that started in April holds $375 million. A more modest version, with a target return of 150 to 200 basis points over LIBOR, is expected to start this week with $380 million in assets, she said.