What characterizes the returns of fixed income arbitrage funds?

The returns of fixed income arbitrage funds are characterized by high Sharpe ratios and substantial negative skewness. High Sharpe ratios indicate that the funds can deliver excess returns compared to the risk taken, reflecting effective risk management and strategies deployed by the fund managers. This suggests that fixed income arbitrage strategies often exploit pricing inefficiencies in the bond markets, allowing for the potential to achieve favorable risk-adjusted returns.

On the other hand, substantial negative skewness signifies that while the funds might often generate stable, positive returns, they can also experience occasional extreme negative returns. This downside risk can be attributed to the nature of arbitrage strategies, which may involve leveraging positions that can be adversely affected by sudden market shifts or liquidity issues.

The combination of high risk-adjusted returns and occasional significant losses is a defining feature of fixed income arbitrage funds, making this characteristic vital for understanding their performance dynamics. Other options do not accurately capture these characteristics, as they either suggest different return patterns or do not reflect the inherent risk-return profile typically associated with these funds.