T-Bill Index. Or an investor who liked the risk profile and diversification of the Lehman Aggregate but did not want to invest in securities rated below A could use a customized benchmark that would be the Lehman Aggregate excluding BBB-rated securities. ACTIVE MANAGEMENT STRATEGIES Once an investor decides on the appropriate benchmark, the next decision is whether to have the portfolio passively managed to try to match the returns of the benchmark or to have the portfolio manager actively manage the portfolio using various strategies with the objective of achieving a higher return than that of the benchmark. As with any asset class, active management of a portfolio is simply tactically changing the risk exposures of the portfolio in order to either achieve the highest level of return given a targeted level of risk or achieve a targeted level of return while taking the least amount of risk. When describing risk and return, we generally define these terms as relative to the defined benchmark rather than as an absolute level. However, if one is managing an "absolute return" strategy such as a hedge fund, the concepts still work. In these cases, whether it is stated explicitly or not, the risk exposures of the portfolio are effectively being compared to a cash benchmark that has no risk, such as a T-bill- or a London Interbank Offered Rate (LIBOR)-based benchmark. Because of this focus on relative positioning versus a benchmark, we would use the terms "long" and "short" to be equivalent to overweight or underweight positions relative to the benchmark. The next section examines the most widely utilized active management strategies for fixed income portfolios. You should note that each of the strategies matches up to one or more of the fixed income risk exposures described earlier. Duration Timing Strategy This strategy is effectively a market timing strategy where the portfolio manager positions the portfolio to have a longer or shorter average duration than the benchmark. A manager would choose to expose the portfolio to more interest rate risk (i.e., be longer) than the benchmark if he or she had a view that the bond market will outperform cash. When evaluating this type of trade, it is always important to determine what the market is "pricing in" in terms of implied forward interest rates. In a typical upward sloping yield curve, forward interest rates are generally higher than current interest rates. It is this implied forward rate that the manager is betting against when instituting a duration exposure. Yield Curve Positioning Strategy We would define a yield curve positioning strategy as one where the manager overweights the contribution to duration (CTD) of one or multiple parts of the yield curve and offsets these long positions with underweights of other parts of the yield curve. We would generally expect this strategy to be run market neutral