not be expected to perform better or worse in rallying markets versus declining markets. Also, any currency exposure generated by the country allocation trades would be hedged using currency forwards in order to distinguish the bet on relative interest rates from a bet on exchange rates. Examples of country allocation trades are selling Japanese bonds to buy German bonds or selling U.S. bonds to buy Canadian bonds. Currency Allocation Strategy In addition to the flexibility to invest in bonds markets around the world, many investors allow active fixed income managers to implement views on exchange rates between one currency and another. This strategy is usually implemented by using currency forward contracts that explicitly expose the portfolio to one currency versus another or by leaving securities denominated in currencies that are expected to appreciate unhedged or only partially hedged. Although the above list of active fixed income strategies is not fully comprehensive, these strategies most likely comprise the vast majority of risks that active bond managers trade in the portfolios that they manage. Managers will utilize different strategies and will allocate different levels of risk to those strategies based on the resources that they have and the confidence that they have in each strategy. Also, within each strategy, managers will use very different inputs to make active investment decisions. The next section will show how we combine the active strategies in such a way as to achieve the most optimal investment results. COMBINING ACTIVE STRATEGIES USING RISK BUDGETING The ability to determine trade ideas that on average add value is most certainly critical to being able to outperform a passive benchmark. However, determining how to size an exposure can be almost as important. Unfortunately, every trade idea will not always work out positively even if based on high-quality research and a disciplined decision-making process. Given this fact, allocating risk efficiently across investment ideas and investment strategies can result in the highest quality returns. In this section, we will show the process that we go through to decide the allocation of risk across the various active strategies. This process of risk budgeting has seven steps: Step 1 Determine the benchmark. The benchmark determines the neutral point for each of the risks in the portfolio. Active views will be taken relative to the benchmark, so it is important to know what the allocation of risk is in the benchmark at all times. Step 2 Determine the investment constraints. Most investors will put explicit limits on what type of exposures they will allow in the portfolio. Sometimes these are absolute limits such as "maximum 30 percent in corporate bonds," and other times they are relative to the benchmark such as "the duration of the