Using Prime Alpha to Separate Skill from Luck in Fixed-Income Strategies

We assess the existence and persistence of manager skill using a unique and broad database of institutional manager returns within the U.S. fixed-income universe. We define prime alpha as the residual return after adjusting for the main fixed-income factors (credit and duration) and find that it is persistent across time. Prime alpha is a strong indicator of manager skill because managers with high prime alpha tend to continue to exhibit high prime alpha. We also show evidence that raw manager returns are not persistent because they are influenced by the cyclical nature of factor returns.