Glossary: Portfolio Management Terms
Fixed income portfolio management uses specialized terminology that practitioners take for granted. This glossary defines the essential terms, organized alphabetically, with cross-references to deeper coverage where applicable.
Active Share - The percentage of a portfolio's holdings that differ from the benchmark. A core fixed income fund with 20% active share holds mostly benchmark constituents; one with 60% active share takes significant off-benchmark positions.
ALM (Asset-Liability Management) - Framework for managing rate-sensitive assets against rate-sensitive liabilities. Insurance companies and pensions use ALM to ensure assets fund future obligations regardless of interest rate movements.
Barbell - Duration strategy placing portfolio weight at short and long maturities with minimal intermediate exposure. Produces higher convexity than a bullet strategy at similar duration. See: Barbell vs. Bullet vs. Ladder Approaches.
Benchmark - Index used to evaluate portfolio performance. Common choices include Bloomberg U.S. Aggregate, Bloomberg U.S. Corporate, and custom composites. Benchmark selection determines whether active returns represent skill or unintended factor exposure.
BPV (Basis Point Value) - Dollar change in portfolio value for a 1 bps (0.01%) change in yield. A $100 million portfolio with $75,000 BPV gains or loses approximately $75,000 per basis point move.
Bullet - Duration strategy concentrating holdings near a target maturity. Lower convexity than barbell but reduced reinvestment and curve risk. Appropriate when targeting specific cash flow dates.
Collateral - Assets posted to secure derivative positions. In cleared swaps, collateral backs both initial and variation margin. In bilateral OTC, the Credit Support Annex governs eligible collateral and haircuts.
Convexity - The curvature of the price-yield relationship. Positive convexity means price gains exceed losses for equal yield moves up and down. Callable bonds and mortgage-backed securities often exhibit negative convexity.
Core Strategy - Fixed income allocation targeting benchmark-like duration and credit risk with 50-100 bps tracking error. Typically invests primarily in investment-grade securities with limited off-benchmark flexibility.
Core-Plus Strategy - Extension of core allowing 15-25% allocation to non-benchmark sectors (high-yield, emerging markets, bank loans). Tracking error typically 100-200 bps versus benchmark.
Counterparty Risk - Exposure to loss if a derivative counterparty defaults before settlement. Central clearing reduces counterparty risk by interposing a clearinghouse between traders. See: Monitoring Counterparty Risk in Derivatives.
CSA (Credit Support Annex) - ISDA document governing collateral posting between bilateral swap counterparties. Specifies eligible collateral, haircuts, threshold amounts, and transfer timing.
Dedication - Strategy matching specific asset cash flows to specific liability payments. Each liability date receives a dedicated bond maturing at that point. More rigid than immunization but eliminates reinvestment risk.
Duration - Weighted average time until cash flows arrive, measured in years. Also approximates percentage price change for a 100 bps rate move. A bond with 7-year duration loses approximately 7% if yields rise 100 bps.
DV01 (Dollar Value of One Basis Point) - Equivalent to BPV. The dollar gain or loss for a 1 bps yield change. CME Treasury Yield Futures have fixed $10 DV01 per contract.
Effective Duration - Duration measure accounting for embedded options. Callable bonds have lower effective duration than modified duration because the call caps upside. Calculated using option-adjusted pricing models.
GIPS (Global Investment Performance Standards) - Voluntary ethical standards for performance calculation and presentation maintained by CFA Institute (Lawton and Reilly, 2012). All top 25 global asset managers claim GIPS compliance. See: Reporting Standards for Fixed Income Clients.
Immunization - Strategy matching asset duration to liability duration to neutralize interest rate risk. Price risk and reinvestment risk offset, leaving portfolio value stable regardless of rate moves.
IRS (Interest Rate Swap) - Agreement to exchange fixed-rate payments for floating-rate payments on a notional principal. Used to adjust portfolio duration without buying or selling bonds. 90.6% of fixed-for-floating swaps cleared centrally in 2024.
ISDA Master Agreement - Standardized contract governing bilateral derivatives. Includes provisions for netting, close-out, and default. The legal foundation for OTC swap transactions globally.
Key Rate Duration - Duration exposure at specific points on the yield curve (2-year, 5-year, 10-year, etc.). Allows managers to position for curve steepening, flattening, or butterfly trades rather than parallel shifts.
Ladder - Duration strategy spacing bonds evenly across maturities. As short bonds mature, proceeds reinvest at the long end. Provides stable cash flow and natural reinvestment discipline.
LDI (Liability-Driven Investing) - Framework prioritizing liability matching over absolute returns. Pension funds use LDI to reduce funding ratio volatility. The 2022 UK LDI crisis revealed risks of excessive leverage in these strategies. See: Liability-Driven Investing Basics.
Macaulay Duration - The original duration measure: weighted average time to receive cash flows. Weights are present values of each cash flow divided by bond price.
Margin Call - Demand for additional collateral when derivative positions move against you. Cleared swaps require same-day margin posting. Missing a margin call triggers forced liquidation.
Modified Duration - Macaulay duration divided by (1 + yield/periods per year). Directly measures percentage price change for yield move. More commonly used than Macaulay in practice.
OIS (Overnight Index Swap) - Swap exchanging a fixed rate for a compounded overnight rate (SOFR in U.S. markets). Used as a proxy for risk-free discounting in derivative valuation.
Portable Alpha - Strategy separating index exposure (beta) from skill-based returns (alpha). The alpha source is "ported" on top of desired market exposure using derivatives overlays.
Rebalancing - Returning portfolio weights to target allocations after market drift. Threshold-based rebalancing triggers at 100-200 bps deviation; calendar-based rebalancing occurs at fixed intervals.
SMA (Separately Managed Account) - Individual portfolio where investor owns underlying securities directly. Allows tax-loss harvesting and customization impossible in pooled funds. Typical minimum $50,000-$100,000. See: Operational Considerations for SMA vs. Fund.
Spread Duration - Duration of the spread component of yield. Measures sensitivity to credit spread changes rather than risk-free rate changes. Investment-grade corporates typically have spread duration similar to modified duration.
TIPS (Treasury Inflation-Protected Securities) - U.S. Treasury bonds with principal adjusting for CPI changes. Real yield plus inflation determines total return. Current 10-year breakeven approximately 2.1% (late 2024).
Tracking Error - Standard deviation of return differences between portfolio and benchmark. Core strategies target 50-100 bps; core-plus strategies target 100-200 bps. Measures active risk, not active return.
Variation Margin - Daily mark-to-market settlement in cleared and uncleared derivatives. Winning positions receive cash; losing positions post cash. Prevents loss accumulation between counterparties.
Cross-references: Barbell vs. Bullet vs. Ladder Approaches, Liability-Driven Investing Basics, Monitoring Counterparty Risk in Derivatives, Operational Considerations for SMA vs. Fund, Reporting Standards for Fixed Income Clients
Last updated: December 2024. Terminology evolves with market practice; verify current conventions for specific contexts.