Active management of bonds is a strategy in which the active management risk factor does not match that of a bond indexing in terms of risk factors undertaken.

It is usually followed for a smaller duration, and hence the management fee and transaction costs are much higher compared to other approaches already discussed.

The advantage of following this approach is that it reduces the manager’s restrictions, and offers the facility to tune the duration of portfolio to the manager. It also offers room for increased expected return out the portfolio.

However, the drawback of using this strategy is that it increases the transaction costs as well as the management fee in most cases. Also, once the manager starts using more intelligence and discretion, his strategy is subject to higher degree of tracking error.