Active versus Passive Management of Bonds (and why passive bond management is an oxymoron)

Jaewon Choi

Research

66 Pages

The authors challenge the usual active versus passive investing story by focusing on bond funds. Their core point is that passive bond funds face high trading costs, illiquid benchmarks, and weaker diversification benefits, which makes active management more valuable.

Key Takeaways

Passive Is Costly: Passive bond funds had average annual rebalancing costs near 25 basis points, versus 0.13 to 1.09 basis points for passive equity funds.
Active Funds Compete: Active bond funds produced 0.30% annualized net alpha in the full sample, while 71% showed positive net alpha.
Skewness Changes Math: Annual bond return skewness was 0.47 versus 1.76 for equities, reducing the diversification edge that supports passive equity investing.
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