Are Fixed-Income Funds “Overstating” True Alpha?

At the end of December, AQR published a paper claiming that most fixed interest funds "overstate the true "alpha" in active FI management."

The paper notes that over the past few decades, many fixed-income funds have outperformed their benchmarks, a trend that has lead to the conclusion among investors that most of these managers are worth their fees.

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Are Fixed-Income Funds Lying About Alpha?

AQR believes that a large amount of the outperformance these managers generate over their benchmarks can be explained by explained by overweight allocations to higher yielding credit instruments. These small 10% to 20% sub-investment grade buckets have been enough to create outperformance and justify fees. The paper concludes that these...