Circular Reasoning in Due Diligence
For example, in the 3rd quarter of 2011,
most active fixed income managers made
the same bet. Specifically, most active
managers bet that long duration treasuries
and government bonds were overvalued
relative to credit bonds. Thus, most active
managers overweighted credit bonds
and many of them underperformed the
index when government bonds rallied.
In other words, there was a common bet
that many active managers made which
ended up underperforming the index;
most active managers underperformed.
On the other hand, there was nothing
to force active managers to make that
bet. It simply is untrue to suggest t